3 Stories in the global economy that should not go un-noticed
Markets roared back to life last week as investors digested an upbeat June jobs report and decided that things were looking up for the U.S. economy. The monthly labor market report was the highlight of the shortened holiday week, and investors responded positively to the optimistic data.
For the week, the S&P 500 gained 1.59%, the Dow increased 1.52%, and the Nasdaq grew a healthy 2.24%.
Here are the 3 stories this week that rose above the noise:
Why Underemployment May Be Worse than it Looks
Last Friday’s jobs report was a roaring success according to most investors. However, the rarely mentioned underemployment rate, a measure of those who have recently quit their jobs and those taking part-jobs but would rather have full-time work, jumped 14.3 percent.
One measure by Gallup puts the underemployment number at 17.2 percent of the work force, down from its peak in 2010, but still at an unhealthy level. This could mean the quality of new jobs being created is not as high as investors initially expect when they see favorable jobs reports. Those working part-time also saw an increase on Friday’s report. Numbers such as underemployment and part-time workers bear further scrutiny before the market declares the labor market back on track.
Short Looks Beautiful to Bond Investors
With yields on the 10-year U.S. Treasury spiking from an early-May low of 1.63 percent to its current level above 2.6 percent, many investors believe that further rate increases are likely and are looking to reduce interest-rate risk in their portfolios. One common approach is to reduce duration by switching to shorter maturities.
A recent article in the Wall Street Journal points out that “Going to shorter maturities typically lowers yield. If you find a fund that invests in bonds maturing soon but doesn't require you to take a lower yield, chances are you're just magnifying other flavors of risk." The article also notes that floating rate notes, a fixed income category that sports low durations, come with an often overlooked element — lower borrower credit.
Central Banks Hone Tools to Pop Bubbles
Another article in the WSJ examines some of the tools being used by global central banks to control asset bubbles in the wake of easy global monetary policies that have been in place since the financial crisis of 2007-2009. Central bankers worldwide are watching these experiments closely —among them U.S. Federal Reserve Chairman Ben Bernanke — as they search for ways to halt borrowing binges before they morph into bubbles.
Some initial results are encouraging. For example, in Canada, housing prices have reversed their rapid rise and fallen for five months after the government changed rules to effectively increase monthly payments on new loans. The ability of these new “macro-prudential” policies to control bubbles has important implications for investors, which have endured two major bubble-bursting episodes over the past 13 years and are concerned about the future possibility of another one forming.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
