Fed Apology, Strong Job Growth Bolster Stocks

February 2, 2019

The economy created 304,000 jobs in December, the Labor Department reported on Friday, much more than the 172,000 expected.

 

 

It was the second consecutive month of much stronger than expected growth in net new jobs.

The unemployment rate rose to 4% but remained in a low range last seen in 2000.

 

While economic fears have been heightened recently, this strong jobs data is not the kind of conditions that have preceded recessions.

 

The better than expected jobs data followed a press conference on Wednesday by Federal Reserve chairman, Jerome Powell, in which he clarified his recent reversal of Fed monetary policy. On January 4th, Mr. Powell first said the Fed would hold off on further rate hikes, a sharp change from the Fed's policy.

 

 

On December 19th, the Fed had nudged up the lending rate it charges banks, the fed funds rate. The Fed chief had said for many months that the fed funds rate would rise to 2% at the end of 2018 and head toward 3% in 2019.

 

The December 19th rate hike, even though it was just a quarter-point, made the Fed seem oblivious to the strong crosscurrents assailing the economy.

 

In the face of growing uncertainties owing to the partial government shutdown, global economic slowdown, and the risk of a trade war with China, the S&P 500 stock index lost 20% of its value from its peak on September 20th to its low on December 24th.

 

On January 5th, 2018 (in black), the one-month U.S Treasury Bill yielded 1.39% versus the 2.41% on January 31st, 2019 (in red) — the current rate. The economy has been strong, and the Fed has been able to raise rates without causing a slowdown, but its plan to raise rates in 2019 to 3% would invert the yield.

 

 

If the Fed continued on its path of hiking rates to 3%, the yield on the one-month Treasury Bill would be higher than the 10-Year Treasury Bond, a dreaded financial condition that historically causes the economy to shrink.

 

 

The Fed chief first announced a change in policy on January 4th in Atlanta, and then went into greater detail at Wednesday's press conference.

 

 

After the Fed chairman's press conference, The Wall Street Journal's editorial page said the Fed's retreat amounted to an apology tour, and according to the lead news coverage, "The Federal Reserve indicated that it was done raising interest rates for now, fueling a market rally."

 

The Standard & Poor's 500 stock index, a key growth component in a broadly diversified portfolio, closed on Friday at 2,706.53, up from 2664.76 a week ago. The market suffered a 19.8% plunge from September 20th's all-time closing high to the Christmas Eve closing low of 2,351.10.

 

 

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.  It is a market value weighted index with each stock's weight in the index proportionate to its market value. You cannot invest directly into an index.

This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.

This article was written by a professional financial journalist for Private Group Wealth Management, LLC., and is not intended as legal or investment advice.

 

© 2019. All Rights Reserved.

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