08|09|2017

The Unemployment Dilemma | August 4, 2017

Unemployment did the Federal Reserve Board (FRB) a major favor this last week as the rate fell to the lowest level in 16 years. Did it do a favor for the market though?

Unemployment

The unemployment report provided optimism across the board! The participation rate ticked up to 62.9%, the overall rate fell to 4.3%, and wage growth held steady at 2.5%. A weak report would have likely delayed action by the FRB. This report gives the FRB more ammunition to execute their agenda later this year. First, they want to start de-levering their balance sheet. Second, they indicated there would be a total of 3 rate hikes in 2017. We have seen 2 thus far and should expect a third late this year.

Stock Market

The markets are already at historically high valuations: Both by a pure price standard as well as a price to earnings perspective.  In addition to high valuations, volatility has been nearly non-existent.

Conclusion

So, what does this mean for the stock market?  Well, the improved unemployment data, while a positive for our economy, and therefore a positive indication of corporate coffers, is not a positive for stock prices. With an FRB incented to raise rates and remove money from the system, equity prices (which have thrived under loose monetary policy) may start to draw down from some of these all-time highs.

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