In order to learn what’s been happening in the economy and what investors expect to happen in the future, conduct a survey of recent returns for different investments.
Let’s start with bonds, which do well when inflation is either low or falling and when economic growth is declining. Long-term treasury bonds rose 12.42% in the last year, 8.63% for the year to date, 8.42% for the last three months and 4.89% in the last four weeks.
That tells us investors don’t view inflation as a problem. It also tells investors to not think that economic growth is going to accelerate soon. It might even decelerate.
When investors expect economic growth to improve, they worry about bonds. Investors would expect the demand for loans to increase, causing interest rates to rise. They also would expect the Federal Reserve to eventually tighten the money supply, which also would cause interest rates to rise. Rising interest rates are bad for bonds.
We also learn from the bond returns that these investor beliefs have grown stronger in recent months. The 4.89% rise in bonds in the last four weeks is a clear signal that investors believe the economy is weak, inflation is low and interest rates are likely to decline further before they increase.
Stocks do well when the economy is growing or growth is expected to accelerate. Stocks also rise when inflation is stable or declining. Stocks do poorly when the economy is slowing or when interest rates are rising because the Fed is trying to slow economic growth.
Stocks have bounced around a lot in the last year.
The S&P 500 returned 5.74% for the last 12 months and 16.10% for the year to date. The index is up 4.21% for the last three months but only 0.28% for the last month.
Those numbers indicate that investors have changed their views of the economy several times over the last 12 months. In late 2018, investors expected the Fed to continue raising interest rates and believed that this move would reduce economic growth. So, stocks declined.
But the Fed put interest rate increases on hold at the end of 2018. More recently, weak economic data have convinced most investors that the Fed would reduce interest rates within a few months. Stock prices, for the most part, have increased in 2019.
Yet, the trade conflicts, especially with China, have been wild cards for stock prices. Traditionally, stock prices decline when trade conflicts seem to be worsening, even when other news and data are positive for stocks. Trade conflicts will continue to increase the volatility of stock prices and put downward pressure on stock prices.
Commodity prices react more directly to global economic growth and inflation. The Bloomberg Commodity Index is a broad-based index that includes a variety of metals, grains and other commodities.
The index is down 14.07% over 12 months but up 1.60% for the year to date. It fell 3.71% over the last three months and 1.69% for the last four weeks.
Commodities generally have been flat since early 2016, following a bear market from early 2014 through early 2016.
The weakness in commodity prices indicates that investors expect demand is not going to increase for a while and that the supply will continue to match or exceed the demand. In other words, global growth will be stable or decline. Inflation also is expected to be low.
I examine the returns of these assets regularly and compare the returns to the recent economic data. Periodically, there are inconsistencies. Either the markets are ahead of the economy or investors are misreading the economy.
Currently, investors appear to be more pessimistic about economic growth than is warranted by the data and expect the Fed to cut interest rates more than the U.S. central bank is likely to do. Economic growth would have to turn down from current levels for the Fed to make the significant rate cuts the markets are anticipating. If the Fed doesn’t act as expected, stock prices are likely to decline. Bonds also might give up some of their recent gains if the Fed disappoints the market.
Small business owners continue to become more positive, according to the Small Business Optimism Index of the National Federation of Independent Business (NFIB). The index came in at 105.0, up from 103.5. That’s four consecutive months of increases, matching several other periods as the second-longest positive run for the measure. The latest increases were preceded by five consecutive months of decline. The index still is below its record high of 108.8 in August 2018.
Two reports indicate inflation is low, though core inflation might be rising a bit. Those two reports are the latest readings for the Producer Price Index and the Consumer Price Index.
The Producer Price Index rose only 0.1% for May, compared to 0.2% for April. For the last 12 months, the index is up 1.8%, compared to 2.2% in April. Excluding food and energy, the PPI increased 0.2% for May and 2.3% over 12 months.
The Consumer Price Index increased only 0.1% in May following a 0.3% increase in April. It was up 1.8% over 12 months, compared to 2.0% in April. Excluding food and energy, the CPI increased 0.1% for May and 2.0% over 12 months.
New unemployment claims rose by 3,000 to 222,000. Last week’s report of no change was revised to report 1,000 additional new claims.
Last Friday’s Employment Situation reports were worse than most people expected. Only 75,000 new jobs were created in May. Also, hourly earnings increased only 0.2% for the month and are up 3.1% over 12 months. The unemployment rate was unchanged at 3.6%.
The JOLTS (Job Openings and Labor Turnover Survey) indicates that the labor market still was strong through April. Job openings were a little fewer than in March, but the number of hirings still trailed openings by a large amount. The number of job openings continues to exceed the number of unemployed who are looking for work.
Consumers finally stepped up the use of credit cards in April. Total consumer credit increased by $17.5 billion, compared to $11.0 billion for March. Revolving debt, which is mostly credit cards, increased $7.0 billion. It had declined by $2.0 billion in March. Student and auto loans make up most of the rest of the increase for April.
The S&P 500 rose 1.92% for the week that ended with Wednesday’s close. The Dow Jones Industrial Average added 1.85%. The Russell 2000 increased 0.85%, the All-Country World Index (excluding U.S. stocks) had a total return of 1.65% and emerging market equities rallied 1.93%.
Long-term treasuries rose 0.38% for the week. Investment-grade bonds increased 0.51%, Treasury Inflation-Protected Securities (TIPS) declined 0.31% and High-yield bonds rose 0.53%.
My review of currency changes showed the U.S. dollar declining 0.34%.
Energy-based commodities rose 0.07%. Broader-based commodities increased 0.80% and gold increased 0.24%.
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