Expectations and events often explain market movement. With earnings season underway next week, every earnings report will be judged on whether those expectations were exceeded, met or missed. Perhaps the most important aspect is if future growth outlook meets expectations.
Led by a 3.8 percent gain in emerging markets, global equities sustained their upward march this week. The S&P 500 returned 1.4 percent and again flirts with an all-time high. 10-year U.S. Treasury yields fell seven basis points as soft inflation data weighed on expectations for future interest rate hikes. The Fed continues to grapple with conflicting signals in an attempt to balance the dual mandate of maximizing employment and stabilizing prices.
Friday’s jobs numbers propelled stocks to roughly break even on the week. While the gain of 227,000 jobs in January was meaningfully above the estimate of 175,000, the unemployment rate ticked up and wage growth ticked down. The increase from 4.7 percent to 4.8 percent in the unemployment rate was due to more people entering the labor force, thus not much of a negative.
The S&P 500 rallied again this week and is back to even for the year. Our original outlook came under pressure from the first day of trading in 2016. We expected rates to be slightly higher for the year and within six weeks the U.S. 10-year Treasury yield had fallen from 2.30 percent to 1.66 percent. We expected stocks to have a modest return of between 5 to 8 percent this year