Good but not Great

Written by: Martin X. Shields

The July jobs report showed that 215,000 jobs were added for the month, slightly below expectations. The job numbers for May and June were revised up, bringing the three month average job growth to 235,000 and the unemployment at 5.3 percent, the same as it was in June.

 
These job numbers continue to be in the “good but not great” range which supports the possibility of the Federal Reserve raising rates in September. Their final decision will be contingent upon solid economic data in August and September.

 
The U.S. equity markets continue their sideways movement with the S&P 500 index up less than 2% for the year. With the bull market in its 7th year, modest economic data and the potential for the Federal Reserve to raise rates, it can be a challenging environment to be invested in stocks. But it is precisely the current pessimistic view of the market and the economy that makes it a reasonable time to be a long-term investor in the market. Below are several points that support this view.

 
• Corporations and consumers continue to be very cautious with their expenditures and debt levels. This allows them to increase their spending if they become more optimistic and doesn’t put them at risk of being overextended if something unexpected occurs.

 
• Both retail and institutional investors have significant amounts of cash on the sidelines, this allows for future buyers in the stock market.

 
• With low commodity prices and wage growth, inflation continues to stay very low. This will allow the Federal Reserve to take a very measured approach to raising rates.

 
• Given the dramatic lows the market hit in 2009 and the very meager growth we have seen in the economy since the beginning of the recovery, it is very reasonable for both the market and the economy to have longer than usual growth cycles.

 
• Stock valuations may be slightly above average from a historical perspective but given the low interest rate environment, they could be trading at even higher valuations since the alternative investment options are so limited.