I threw some Beyond Meat patties on the BBQ yesterday to see what all the hype was about. It looked like meat and sizzled like meat, many politely ate it, but a few discerning guests and kids didn’t buy in. Sometimes looks, and even scents and sounds, can be deceiving. We are seeing this same type of action in the Stock Market. Prices are high, and indications on the surface suggest the market is healthy, but under the surface, we are seeing indications of a different story.
Since a ferocious sell-off in December of 2018, the Stock Market has recovered and continues to heat-up. But how hot is too hot? When will the sizzle begin to subside and fizzle? As we outlined in our Summer Newsletter last week, we are increasingly concerned about the underlying health of this market. While we touched all-time highs earlier this week, they did not last.
There was a little less sizzle in the market today despite a jobs report which beat expectations handsomely. 224,000 jobs were added to the US economy in June, well above the 165,000 that was expected. This was a sharp contrast to the May report where only 75,000 new jobs were created. Yet on this strong report, the Stock Market sold-off immediately. This strong job number lowers the probability that the Fed will reduce rates at its next meeting and many on the Street had already priced in a rate cut for July. Anticipation for rate cuts has been fuel for the Stock Market. It’s important to note that just a few months ago the Fed had been planning on four rate increases in 2019, heading into today, three rate cuts were expected, with many anticipating the first to come this month. You may recall that historically the stated job of the Fed is price stability and maximum employment. With employment strong, the likelihood of a rate cut in July is now lower and this caused the market to sell-off this morning. As the trading day wore on, it recovered some ground on very little volume, but still closed below the highs from earlier in the week.
A good jobs report is good news for the US economy in the long-term, but the short-term seems to be the primary focus for more and more investors which can increase volatility. This reminds me of another favorite summertime treat – roasting marshmallows. It takes time and patience to get the perfect golden brown; if you try to rush the process by getting closer to the flames your marshmallow catches fire and is ruined. Discipline is required for investors too. When the flames get too high, we stay warm from a safe distance, ready to get closer when things calm down. We are investors for the long-term, while being mindful of short-term influences, this has not changed.
Have a nice weekend. We’ll be back, dark and early on Monday.