Economic Bad News is Good News For Investors

Ed Mertiri |

TV Interviews with Erin Gibbs

Are we entering a bull market?

Fox Business News

 

A sharp decline in longer-term bond yields has powered a rebound in stocks for the past seven weeks. It’s a “bad news for the economy is good news for stocks” scenario. The two consecutive quarters of declining GDP gave investors greater confidence that borrowing rates will not go significantly higher than prepandemic levels. However, investors were slightly disappointed by the higher-than-expected jobs report on Friday. Employers added 528,000 jobs in July bringing the number of jobs above pre-pandemic levels. Unemployment dropped to 3.5%. The robust jobs report might mean the Federal Reserve will retain its aggressive rate increase policy.

Given most materials and raw costs have come down in July it’s possible inflation will finally slow, allowing bond yields to remain low. Lower bond yields create a more favorable environment for stocks.

The yield on the 10-year U.S. Treasury, which sets a base for the largest range of borrowing costs and an important sentiment indicator, had a peak yield of 3.48% on June 14th. Since then the yield has declined, including the biggest monthly decline in July since March 2020, closing at 2.85% on Friday.

Stock markets have been rebounding since mid-June. The NASDAQ 100 index, a more volatile and tech-heavy index, is close to making the definition of a bull market from it’s low on June 16th. It was up 19% from it’s June low on Friday. The more diversified S&P 500 is a bit farther away from a bull market, only surging 13% from its June lows.

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