Let the Games Begin

by Jason Norris, CFA Executive Vice President of Research

With the opening ceremonies of the Rio Olympics set to begin tonight and on the heels of a strong number in the month of July in which the U.S. added 255K jobs, stocks ended the week with a bang. This was meaningfully ahead of expectations and wage growth was steady at 2.6 percent. We believe this continues to demonstrate that the U.S. economy remains healthy. While we don't believe that the labor market is yet inflationary, bonds sold off this week, driving the yield on the 10-year Treasury up to 1.56 percent. This data also allowed the tech-sector-heavy NASDAQ and the S&P to hit all-time highs.

Low interest rates have already taken a toll on the banks and this week it hit the insurers. Specifically, MetLife reported earnings this week that included a major charge because low interest rates resulted in a $2.0 billion expense in their variable annuity business. Annuities are a contract with an insurance company promising an income stream. With low global interest rates (see chart), it is becoming more difficult for insurance companies to meet their targets.

Rates chart
Rates chart

While it is way too early for annuity holders to become concerned, this does show the ramifications of low rates.

 A popular stock highly touted by CNBC pundit Jim Cramer, Bristol Myers, hit a major roadblock this week. Bristol and its competitor, Merck, are leading the race in immuno-oncology (IO), which is a novel treatment of cancer. Bristol has been trading at a large premium to Merck due to the belief that they were in the lead and had greater revenue exposure to IO therapies. However, this morning Bristol announced disappointing results in its first line of lung cancer treatment and Bristol lost 16 percent while Merck ran up by 8 percent.

Our Takeaways for the Week:

  • Jobs numbers and wage growth were a boost to the trading week
  • Record low interest rates around the globe have some negative consequences