by Franklin J. Parker | Due to the abbreviated July 4th week, this update will be shorter than usual.
The Summary
- Not much data this week, though the FOMC meeting minutes on Wednesday could move markets as investors digest the changing sentiment of the Fed. On Friday, San Francisco Fed President Daly mentioned that she would be open to tapering some asset purchases before year-end. One FOMC member does not a policy make, but it is indicative of the shift toward a less dovish Fed.
- June job figures posted on Friday with the unemployment rate ticking up slightly to 5.9%, though there were more jobs added than expected (850,000 vs 720,000 expected). Though the headline rate ticked higher, this is a sign that the labor market continues to improve. Breaking down the data shows that 25 to 54 year-old men saw the strongest rise in participation, whereas 16 to 24 year-old men saw a dramatic drop in labor-force participation.
- Though this week is light on data, earnings season kicks off in earnest next week. The major banks report along with some industrial companies. In any case, investors should watch these reports carefully to (1) see how profits are tracking relative to expectations, and (2) listen for forward guidance—especially in the areas of labor costs and stock buyback restarts.
Chart of the Week
Since 1980, bond yields have been on a steady trend downward. This has many side effects (not the least of which is a whole generation of bond managers who have never managed money in a rising rate environment). One side effect has been to push yield-seeking investors toward stocks. Yet stocks, too, have seen a fairly steady drop in dividend yields—to the point that stock and bond yields are at about parity.
Of course, some of this shift in stock yields can be attributed to higher tax-awareness. Dividends are a tax-inefficient way to return cash to shareholders, so in lieu of dividends many companies have shifted to stock buybacks.
In any case, yield-hungry investors have been pushed to take larger risks to gain the same return. As bond rates rise, bonds should naturally pull some of that yield-seeking capital back, and that puts some downward pressure on the sectors which previously benefitted from the yield-seeking inflow.
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