Economic and Stock Market Commentary for the week of June 13, 2018
May’s uplifting jobs report helped to turn around a stock market that had come under duress from global headwinds. To wit, the government’s survey showing a 223,000 increase in jobs in May, an 18-year low in unemployment, and a 2.7% rise in average hourly earnings over the past year was greeted warmly on Wall Street, with stocks rising for several days on this news. The rationale for this rally is that the economic picture should still be bright enough to keep corporate earnings moving nicely higher, but not so strong that we are in danger of suffering unwanted inflationary excesses.
In the short run, though, the fragile outlook overseas may again play a key role in our markets. Here, the key issues are our complex and uncertain nuclear dealings with North Korea, trade differences with China, tariff disputes and a potential trade war with allies such as Canada, Mexico, and the European Union, and political dramas in Italy and Spain. As May ended and earnings season wrapped up, global firestorms, more than domestic developments, had grabbed the headlines. As international matters are less predictable, and Wall Street prefers more certainty, stocks suffered for a time.
For now, however, the focus appears to be back on the fundamentals, and that is clearly benefiting investors. That is because in addition to the upbeat jobs report, we are seeing increasing strength in consumer expenditures, manufacturing, and non-manufacturing. This combination is likely to help second-quarter gross domestic product increase by more than 3%. A similar showing is likely in the second half. All the while, the Federal Reserve, which is to meet after this report goes to press, is likely to move interest rates higher, but at a gradual, orderly pace.
Meanwhile, the stock market is behaving in anything but orderly fashion, lurching back and forth in response to the latest global and domestic headlines. Although aggregate change has been limited for several of the indexes so far this year, the elevated volatility has raised the level of investor skittishness.
Conclusion: Given the myriad issues facing investors in the months to come, any deviation from this inconclusive trading pattern is unlikely.