Perspectives from Above the Noise -- Week of July 9th, 2018

• It’s all About Fundamentals. Wall Street largely overlooked the latest escalation in the U.S.- China trade dispute after a solid gain in June payrolls and a subdued YoY gain in hourly wages sparked optimism and eased worries about inflation and more aggressive rate hikes. The S&P 500 finished broadly higher, snapping two consecutive weekly declines.

• Small Cap Perform Best. For the week, the S&P 500 gained 1.56%, the Dow Industrials added 0.82%, ending a three- week losing streak, and the tech-heavy Nasdaq Composite advanced 2.40%. Small caps outperformed last week, with the Russell 2000 rallying 3.12%.

• Goldilocks Payrolls Report. The U.S. economy added 213,000 new jobs in June, topping forecasts, while upward revisions added a further 37,000 jobs. The unemployment rate rose to 4% from 3.8%, but for a good reason, as 601,000 people returned to the workforce.

• Only Energy Lagged. Ten of the 11 major sectors posted gains last week, led by Healthcare (+3.14%), Utilities (+2.44%) and Technology (+2.34%). Financials (+0.40%) rose the least, while Energy (-0.33%) lagged.

• Treasurys Edge Higher. The U.S. Dollar retreated on three of the four days of the holiday-shortened week, while prices on Treasurys advanced. For the week, the yield on benchmark 10-year notes contracted by nearly five basis points, ending Friday at 2.823%. WTI crude oil prices slipped from a near four-year high, ending the week at $73.80/barrel.

What We’re Reading

Brexit Resignations - Uncertainty -- Bloomberg

Oil Could Rise More This Summer -- Fox Business

Bond Liquidity Gets Tighter -- Reuters

Chart of the Week:  Fed Fund Rates Rising, But Not a Threat

The elevated volatility experienced in equity markets this year is largely the result of rising inflation and an acceleration in Fed monetary tightening. This is a concern for investors because price increases and restrictive monetary policy are late-cycle signs, and similar conditions have preceded the last nine recessions. This is undoubtedly a market risk, but keep in mind that interest rates are still relatively low by historical standards and have not reached a level that will suppress economic growth in a meaningful way. The Federal Funds rate is currently at 1.91%, but has averaged 4.86% since 1955. It has risen to at least 3% ahead of the previous nine recessions and rose to 5.25% ahead of the last recession. At this point, we are not on alert for a recession. Eventually, interest rates -and potentially inflation- will rise to a level that slows the economy. When that happens, other recession indicators will begin to flash warnings, including a sustained rise in the unemployment rate, a slowdown in manufacturing and industrial production, weak retail sales figures, waning consumer confidence, and an inverted yield curve. Fortunately, none of these recession barometers are currently indicating slowdown signs.

Some materials are chosen by the Cetera Investment Management team and summarized by Jason Vitucci who is not affiliated or registered with Cetera. Cetera Investment Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. Cetera Investment Management individuals who provide investment management services are not associated persons with any broker-dealer. International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.