Goldilocks Reborn: Stocks Rise on “Just Right” Data
Reports of Goldilocks’ demise were premature. The latest economic data show an economy that’s not-too-hot, not-too cold, offsetting previous numbers that pointed to an overheating expansion. These “just right” readings are a gift for investors.
Stocks on Monday extended their sharp gains from Friday, with all three main indices closing firmly in the green.
The bulls got further assistance today from an increase in oil prices, which reassured investors that economic growth remains on track despite last week’s mixed jobs report. Supply disruptions in strife-torn Venezuela also contributed to crude’s climb.
It appears that Goldilocks growth is back on the menu, which is exactly to Wall Street’s taste.
West Texas Intermediate, the U.S. benchmark, rose 0.16% to close at $69.83 per barrel. Brent North Sea crude, on which international oils are based, rose 0.64% to close at $75.35/bbl.
As the chart shows, oil prices have been on a steady upward trajectory over the last month (data from the U.S. Energy Information Administration):
Apple’s (NSDQ: AAPL) stock today rose 0.72% to hit another record, racking up its best six-day rally in nine years.
The tech giant soared in the wake of reports that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) had purchased a stunning 75 million shares in the first quarter.
Tricky Dick’s legacy…
The U.S. Labor Department reported last Friday that the unemployment rate in April fell to 3.9%. The question now is how long the unemployment rate can stay below 4% without fueling inflation.
Since World War II, only the late 1960s witnessed a prolonged period when the rate stayed below 4%. That’s when Richard Nixon followed Lyndon Johnson into the White House, American troops were dying in Vietnam, and protestors were fighting in the streets. Double-digit inflation combined with an economic downturn emerged in the 1970s, giving way to a phenomenon dubbed “stagflation.”
Many complex factors created a recession and rising prices during the Seventies; two of them were ballooning federal deficits and new tariffs. (Sound familiar?) Stagflation amounts to Armageddon for stocks.
The economy has enjoyed a record 91 straight months of job growth. Investors now fear that a tight labor market will generate wage growth, which in turn would fuel inflation and prompt the Federal Reserve to more aggressively hike rates. Rising interest rates tend to kill bull markets.
However, Friday’s report showed that hourly earnings went up by 2.6% over the past year, barely outpacing the inflation rate. The muted wage gains helped spark a stock market rally on Friday and again today.
One explanation for sluggish wage gains is a shrinking labor force. A smaller proportion of people are participating in the labor market, which makes it easier to get low levels of unemployment. Another factor is the aging baby boom generation. The folks who dropped acid at Woodstock and Altamont are turning gray and shuffling into retirement, whereas baby boomers who are still working don’t wield the same pay competitiveness as younger workers.
What’s more, the Labor Department reports that 60% of the jobs added since 2010 have been in service-sector positions that typically pay lower wages. A half century ago, America had a greater number of well-paying manufacturing jobs that were protected by unions. Those blue-collar jobs have mostly fled overseas, while at the same time union membership has plummeted.
These days, the imminent release of a major new economic report makes investors jumpy. Any whiff of negative news can dramatically move markets. President Trump’s trade protectionism adds to the uncertainty.
Negotiations to revamp the North American Free Trade Agreement (NAFTA) start again today with greater urgency than ever, with pressure to resolve disagreements before the July presidential election in Mexico and the midterm elections in the U.S.
Washington is playing hard ball on NAFTA. In particular, the Trump administration is insisting on a sunset clause that could automatically kill the trade deal after five years. Companies in the U.S., Canada and Mexico are concerned that undermining NAFTA would disrupt the global supply chain and increase their costs, which would in turn get passed along to consumers.
A trade war also would kill the global economic expansion. U.S. manufacturers added 73,000 jobs in the first quarter, considerably more than in the same period last year. But the White House’s tariffs on steel and aluminum are starting to spook companies and dampen factory activity, as managers wait to see how trade conflicts pan out before making long-range plans.
The Institute for Supply Management reported last week that manufacturing activity grew in April at its slowest pace since July. The rate of growth was still decent but suggested a moderate slowdown — another sign that Goldilocks is back from the dead. But be forewarned, her reprieve might only be temporary. Tax cuts, federal deficits, trade conflict, rising inflation, and a looming recession could all conspire to kill her off again.
Monday Market Wrap
- DJIA: +0.39% or +94.81 points to close at 24,357.32
- S&P 500: +0.35% or +9.21 points to close at 2,672.63
- Nasdaq: +0.77% or +55.60 points to close at 7,265.21
Monday’s Big Gainers
- Gramercy Property Trust (NYSE: GPT) +15.47%
Industrial REIT targeted in $7.6 billion buyout deal.
- E.W. Scripps (NYSE: SSP) +10.45%
Publisher posts robust operating results.
- EP Energy (NYSE: EPE) +6.50%
Energy producer impresses with earnings.
Monday’s Big Decliners
- Ascent Capital Group (NSDQ: ASCMA) -11.22%
Diverse holding company faces headwinds in key markets.
- Sears Holdings (NSDQ: SHLD) -9.39%
Storied retailer continues inexorable decline.
- Tower Semiconductor (NSDQ: TSEM) -9.22%
Chip maker misses on earnings.
Letters to the Editor
“What are the rules regarding loans from 401k plans?” — Tom A.
You’re allowed to borrow up to 50% of your vested account balance to a maximum of $50,000. Plans often establish a minimum amount and restrict the number of loans you can take at any one time. Repayment is usually in the form of installments automatically deducted from your paycheck.
If you leave your job, any unpaid portion of the loan will be calculated as income and be subject to taxation and, if you’re under the age 59 1/2, a penalty.
Questions about retirement investing? Drop me a line: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.