Investors Take Note of Geopolitical Risk

Belligerent rhetoric between the U.S. and North Korea commanded investor attention last week, pushing everything else to the side, at least temporarily. With earnings season, mostly complete, a light economic calendar, no central bank meetings and the U.S. Congress in recess, the heightened geopolitical tensions were enough of a concern to knock stocks off their stride and provide a lift to other, safe-haven assets.

July Jobs Report Shows Growth, but Wages Stubbornly Stagnant

The July employment report was almost about as good as it gets. The U.S. economy generated 209,000 new jobs, well in excess of the anticipated 180,000. As expected, the unemployment rate fell to 4.3 percent, matching the May low for this cycle. Average hourly earnings have yet to accelerate, but the pace did increase modestly in the month, and the participation rate edged higher. If the Fed does, indeed, intend to shrink its balance sheet starting in September, there was likely nothing in this report that would dissuade it from doing so. And following the report, expectations for a December rate hike increased to 40 percent from the 37 percent the day prior.

Ignoring Inflation Could Leave Markets Vulnerable

The S&P 500 was unable to make it four straight weeks of higher prices last week, but the decline it suffered was fractional. So far in the month of July, the index is 2 percent higher. Unless Monday is a sharply down day, July is on track to be the best month for stocks since February, when the reflation trade was still alive. Most of that return has come from the technology sector, although it stumbled a little last week. Also helping has been the energy sector, which came to life in just the past week with a gain of 2 percent, as it tracked the price of oil higher. In fact, with one trading day to go, every sector has made a positive contribution in the month.

What’s Pushing Markets Higher? It’s not the Reflation Trade

The rally in U.S. equities rumbled along last week, as stocks rose for the seventh time in the past nine weeks. The S&P 500 added 0.5 percent to bring its return for the year to 10.4 percent. The market darlings last week were the sectors least associated with anything resembling a reflation trade. Utility stocks led the way higher, followed by telecom and healthcare. Technology stocks also continued their push higher, seemingly impervious to the vicissitudes of economic sentiment or Washington politics. In contrast, industrials, financials and energy stocks lost ground.