3 Stories in the global economy that should not go un-noticed
Last week, investors reacted nervously to sabre rattling between President Obama and Russian President Putin over the Syria predicament. Markets ended the short week in the black despite sustained volatility as traders worried about escalating tensions in the region and the prospect of an end to the Federal Reserve’s economic stimulus.
For the week, the S&P 500 gained 1.36%, the Dow climbed 0.76%, and the Nasdaq rallied 1.95%.
Here are the 3 stories this week that rose above the noise:
Bonds Still Belong in Your Nest Egg
The recent pronounced weakness in the bond market has deservedly received an enormous amount of coverage in the mainstream press. An article from The Wall Street Journal provides some perspective on why bonds should still play an important role in many portfolios as well as providing some historical context on how the broad bond market has held up during prolonged periods of rising interest rates.
As noted in the article, the interest-rate risk of a bond portfolio can be reduced by shortening the duration of the holdings and bonds are likely to continue to be helpful in offsetting some of the volatility associated with stocks.
Unemployment Falling for Wrong Reason Creates Fed Predicament
Last week’s employment report received mixed reviews, with a falling headline unemployment rate a positive data point that was offset by a continuing drop in the labor force participation rate. A recent Bloomberg article provides a good summary of the important impact the participation rate has on the headline unemployment rate.
As noted in the article, there is growing belief among economists that a substantial portion of the drop in the participation rate is due to structural forces that will not be reversed, most notably an aging workforce. However, the degree to which part of the decline in participation is cyclical and will rebound with the economy has important implications for future Fed policy.
Economists Expect 3% Growth in 2014
The U.S. economy grew by 1.1 percent in the first quarter and 2.5 percent in the second quarter, but economists surveyed by the National Association of Business Economics predict that U.S. economic growth will decelerate to 2.3 percent growth in the third quarter before accelerating to 3 percent GDP growth in 2014.
Employment growth is expected to increase marginally, from a monthly increase in nonfarm payrolls of 180,000 per month this year to 199,000 in 2014. Additionally, the economists surveyed place a 45 percent probability that the Federal Reserve will begin scaling back its third round of quantitative easing this year because of the projected modest improvement in the economy and labor market.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
