June began where May left off; Market volatility. Friday brought a shockingly weak job report for May. Just 38,000 jobs were created in May. Expectations were 164,000. It was the worst month for job creation in 6 years. What’s worse is both March and April were revised downward. That certainly throws a wrench in the Fed playbook, as it appeared they were prepared for another rate hike in June or July. Perhaps they still are. Fed Chair Janet Yellen is on record saying the US needs 100,000 jobs per month to keep the economy growing. Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The Market needs to figure this one out. It’s a total head-scratcher.
All along, the key has been the resiliency of the US economy. Despite all the problems overseas, things were far more stable at home economically. This reports raises more questions than answers at this time. Interest rates fell on the news, suggesting no rate hike ahead. Bonds liked the news. Stocks are trying to take things in stride. Interestingly, the price of Gold surged on the news, as did other metals. We have been building a pretty substantial position in Gold in 2016, and believe the prospects are compelling for higher levels.
So what do we know and where do we go?
The US economy: It’s growing, but it’s not clear by how much. The brakes just got slammed on jobs, which raises so many questions about the health of the US economy. Our sense is things pick up economically in the second half of the year, but acceleration could be muted based on what we learned today.
The Fed: They meet in 2 weeks, and after the weak job report for May, the chances of an interest rate hike are close to zero. The Market is still pricing in a 33% chance of a rate hike in July, but that number was 52% yesterday. We have felt all along it’s September at the earliest. Our belief is a rate hike would be a positive event long-term, but will certainly create some bumps for the Market as it makes adjustments.
Europe: There are many problems that require major attention. Economically, things are very challenged. The unemployment rate remains high and growth is very low. Dealing with the refugee crisis has been a major challenge with repercussions economically, politically and geopolitically. There is a vote on June 23 which will determine whether Great Britain remains in the European Union. It’s a close call at this point, but polls suggest that the Brits stay. The Market is certainly not pricing in a British exit in our minds. It would have a significant impact on the European and Global economy, and it wouldn’t be positive.
The Presidential election: We know there’s going to be one in November and it’s going to be animated. Things are really heating up on the campaign trail, and we’ll learn a lot after the California primary next week. The stakes are high, and the clarity on the outcome is very low. The Market never likes uncertainty, particularly with elections.
Economic data around the globe is slowing, that is clear. Expect more volatility ahead. We already have. This is going to be an eventful Summer for the Market in our estimation. The wild ride on Wall Street continues. We’re all over it.
Have a nice weekend. The weather has been sizzling in the Bay Area, typified by this Golden State Warrior run. We’ll be back, dark and early on Monday.