Economy

The Market is Incoherent

Written by SK Ashby

With all the bad economic news we've seen this week, you might expect that Wall Street would be having a tough go of it, but they're not.

Although Labor Department data shows that hiring was effectively flat last month, and although Trump is poised to impose more tariffs on Monday, the stock market is having its best week in over seven months.

Why? Because the Federal Reserve may cut interest rates later this year.

I couldn't even read this report from the Associated Press without making a series of irregular faces.

Investors bought stocks and bonds after a report showing weaker than expected hiring in the U.S. in May appeared to increase the odds the Federal Reserve will have to cut interest rates in the coming months. [...]

Bond prices rose, pushing yields lower, also a sign that the market is worried about slower economic growth. The yield on the 10-year Treasury fell to 2.07% from 2.12% on Thursday. Banks, which rely on higher yields for profit from loan interest, fell broadly and pulled the financial sector lower.

But most sectors soared higher. Technology stocks led the gainers on Friday. Microsoft rose 3% and Apple rose 2.8%. Health care companies and internet stocks were also among the largest gainers. Johnson & Johnson rose 1.5% and Facebook rose 2.4%.

Analysts are more confident that the Fed is closer to cutting rates as it gauges the latest weak employment data and downward revisions for previously reported data.

In short, small businesses and average Americans are hurting, but lower interest rates will allowed the largest companies in the world to take on even more debt to fuel more acquisitions, mergers, and dividends before it all comes tumbling down. Falling retails sales and job growth be damned.

Keeping interest rates at or near zero is not normal, at least historically, but it has been normalized. And when the next recession eventually arrives, the Fed may have nowhere to go with rates.

We know Trump pays close attention to swings in the market, so he may see this as a sign that it's okay to go ahead and impose all the tariffs he wants.