The Good and Bad of It

Sometimes good news is bad news. Such may have been the case this week with the strong jobs number. Yet there is perhaps a silver lining in the fight against inflation.
Contributed by Doug Walters , Max Berkovich , David Lemire , Eh Ka Paw
Inversion surrounds us. Yes, the yield curve is currently inverted, but we will not discuss that today. We have broached that topic several times in the recent past. Instead, we will focus on the inversion of good and bad.
This week’s job number spotlighted the good news / bad news debate. There are times in a cycle when good economic news can be bad for stocks. Right now may be one of those times, as highlighted by Friday’s jobs number (see our Headline of the week). The job number was stellar, and the immediate reaction of stock futures was to fall. So why is this?
Investors’ biggest concern is inflation, or more specifically, stagflation (inflation plus economic weakness). By this logic, a sign of economic strength (the jobs market) should be cause for investor celebrations. The problem is that any continued signs of strength could lead to a need for the Fed to act more aggressively in raising rates. Higher rates, all else equal, reduce stock valuations, driving stock prices down (particularly growth stocks). Therefore good news can be bad news.
With that said, a recession may already be here (depending on who you ask), but there is comfort in assurances that there is still some economic ballast that may help The Fed achieve a soft landing in this fight against inflation.
Headline of the Week
This week was relatively quiet compared to the previous week, where we had Federal Reserve action and a GDP number fueling the “recession” debate. However, the week ended with a jolt as the ever-volatile, but highly followed, “jobs” number came out.
- The US Bureau of Labor Statistics reported non-farm payrolls on Friday.
- The report showed a 528K gain in jobs compared to an expectation of 250K.
- June was revised up from 372K to 398K, while unemployment ticked down to 3.5%.
- Wages rose 0.5% month-over-month.
The report was good news for employees but a potential concern for those hoping to see evidence that The Fed’s actions are slowing down the economy. Either way, this report needs to be read with a grain of salt. The monthly numbers are very volatile and highly subject to revision. If we look year-on-year rather than month-on-month, employment growth has been relatively steady at 4-4.5% for the past year. Those are high numbers compared to the median of 1.5% over the past 20 years. But that shouldn’t be too unexpected as employment has only just caught up to pre-pandemic levels.
The Week Ahead
Welcome to the summer doldrums. Inflation will be the focus next week; however, China will likely stay in the news.
Peaking or Peaked?
With Consumer Price Index (CPI), Producer Price Index (PPI), and Import-Export Price Index on the docket next week, inflation will dominate market action.
- With oil prices trending down, in the $80s per barrel level this week, will the inflation gauges start reflecting progress?
- The market is keeping a keen eye on some relief and is expecting 0.5% increase in the core CPI (ex-food and energy), a moderating rate from the previous report’s 0.7% increase.
- The PPI is expected to increase by 0.3%, a significantly slower rate than the 1.1% in June.
Peking in Focus
After the drama of Speaker Pelosi’s visit to Taiwan last week, investors are hoping to move on, but no such luck as China will report trade numbers this weekend and some inflation numbers mid-week.
- With Covid-related restrictions easing the past few weeks, economic data improvement would be welcome. However, the quickly deteriorating property sector in China is causing headaches.
- China tends to flood the system with liquidity when there are signs of problems.
- This past week added another tool to fighting bad economic headlines for the 2nd biggest economy in the world. Distraction!
- Fueling nationalism seems to help direct attention away from economic troubles.
Economics and Earnings
Not much else is expected to move the needle next week, with the University of Michigan Consumer Sentiment Index and UK GDP as the other notable economic developments and Walt Disney’s and several other big media earnings as the only major corporate reports on our radar.
About Strategic
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.
OverviewDisclosures
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.