The Dow (+0.8%), NASDAQ (+4.6%), and S&P 500 (+2.0%) each gained for the week. Taxable bonds were down about 1%, while tax-free municipal bonds were up about 1%. The divergence between the taxable and tax-free bonds may simply be a result of the tax-free municipal bonds being oversold and attracting investors at their lower values. The divergence between stocks and taxable bonds is “typical”, as investors last week moved away from the safer bonds and into riskier assets such as stocks.
The move toward riskier assets last week was a result of better-than-expected economic data, causing investors to believe the risk of a recession has subsided a bit. FYI – I’m not one of those believers, but economic data was very strong. The jobs report showed a much higher increase in jobs in June, keeping the unemployment rate low at 3.6%. Another jobs report showed 11.5 million job openings at the end of June, and the services ICM index also rose to a healthy number. The June inflation data will also be reported this week, and rumors suggest it will be even higher than the 8.6% reported in May. If so, I expect that to quickly squelch the optimism from last week’s economic data.
2nd quarter corporate earnings season unofficially begins this week, and this is where the rubber meets the road. The consensus estimate is for a 5% growth over last year, but it will be the remarks of the companies regarding their forecasts for the next quarter, and how much inflation could impact their profits. Unless if companies report much better earnings than expected over the next few weeks, and their forecasts are positive, we may have a rough road ahead of us the next couple months until inflation data becomes more favorable. At least we’ve seen a small break in the rise in gas prices recently, but will that be enough? By itself, I don’t think so, but time will tell.
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About the Author: Michael Menninger, CFP®️