July 5, 2019 – Stocks finished this holiday-shortened week higher, but only two of the three-and-a-half trading days are particularly interesting.
Stocks gapped higher ahead of the open Monday morning on news that the U.S. and China will be resuming trade talks. We discussed these developments in our piece from Monday. The short version is that a deal is still a long way away, but an agreement to restart talks that postpones further escalation of the trade war is a positive.
Stocks did post gains in light volume during Tuesday and in Wednesday’s shortened session. More interestingly, bond yields continued to fall, hitting levels not seen since 2016. The recent rise in stock prices while bond yields are also falling is a bit of an anomaly, as money flows between asset classes often send yields and stock prices in the same direction.
On Friday we got the monthly Employment Situation Report from the Bureau of Labor Statistics. The economy added 224,000 jobs in June, which topped estimates, while the unemployment rate rose. Average hourly wages were higher, but missed estimates just slightly.
With the exception of continued slow wage growth, this was a good report. The higher unemployment rate seems bad, but with 224,000 new jobs added, it signals people coming off the sidelines to start looking for work, which is a positive sign for the economy. That steady stream of new workers, despite a decade-long recovery, is likely why wage growth remains low. If the supply of available workers were actually starting to dry up, wage growth would increase as competition for workers between firms started to increase.
Where thing get confusing is in the reaction to the report. A strong economy is what everyone wants, but stocks opened lower before recovering much of the loss as the day progressed. More people working means more people with money to spend, which should be a good thing for the prospects of corporate earnings… so why did stocks retreat after a positive report?
The Federal Reserve.
More specifically, because a strong labor market removes much of the impetus on the Federal Reserve to lower interest rates. We feel that data showing a stronger-than-expected economy better than slightly lower overnight interest rates in the long term, but the stock market is both a complex computer network than can act within fractions of a second to incoming data, and a tool that is supposed to put an accurate value on the future cash flows of corporations, so things are frequently sold first while questions get asked later.
All told this week, the S&P gained 1.60%, the Nadsaq added 1.94%, and the Dow Jones rose 1.21%.
The S&P 500 and the Dow Jones were able to set new record highs this week. The Nasdaq came very close to setting new highs, rising as high as 8171.97, but was unable to rise above the 8176.08 high set on April 29 of this year.
Today we will be looking at a comparison chart spanning the last two years. We often look at support and resistance levels along with major moving averages, but it is important to periodically look at how major indices have performed compared to one another. It is also important to look back over longer time periods when looking for support and resistance, especially when the market has experienced major bouts of volatility which we have seen since the beginning of 2018 and do not show on a standard 1-year chart.
The S&P 500 (dark blue), which consists of large-cap stocks and is one of the leading indices for judging market performance, has gained 23.1% since July 5, 2017. The S&P has greatly outperformed the Russell 2000 (light blue), which consists of small-cap stocks, especially since the beginning of 2019. The Russell has only gained 10.5% since July 2017. The Nasdaq (red), which primarily consists of technology stocks, has gained 33.6%, outperforming both the S&P and the Russell, as well as the Dow Jones, which has gained 25.3% since July 2017.