For investors and economists, there is always something to worry about.
When stock prices are high, we worry that they’re going to fall. When they’re low, we worry that they may stay that way for an extended period. When the unemployment rate is too high, we worry about the lack of jobs. When it is too low, we worry about labor shortages and inflation.
Treasury Secretary Steven Mnuchin
So today, even as the economy appears to be booming and the stock market was soaring until recently, we have plenty to worry about. It seems as though every piece of good news is balanced by something else to worry about.
Low Unemployment vs. Rising Interest Rates
Nonfarm payrolls rose by a seasonally adjusted 200,000 in January, exceeding expectations of 177,000 new jobs. Given demand for workers, wages showed their strongest increase since the 2007 recession.
That’s good news. But economic growth is supporting a case for the Federal Reserve Board to raise interest rates at a faster pace this year than previously anticipated. And investors are perceiving that as bad news.
Higher rates will make everything from housing to business investment more expensive, so the news resulted in U.S. stocks experiencing their largest weekly drop in two years, followed by the largest single-day point decline ever for the Dow.
Strong Dollar vs. Weak Dollar
The recent jobs report also strengthened the dollar, which was up 0.7% recently when measured against 16 other currencies. When tighter monetary policy is expected, the dollar typically strengthens, because rising rates make the dollar more attractive to investors seeking yield.
A week earlier, though, Treasury Secretary Steven Mnuchin was touting the benefits of a weak dollar at the World Economic Forum in Davos.
Noting that a weak dollar is helpful for American companies selling abroad, he added that, “Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency.”
Bonds vs. Inflation
With a report from the Labor Department suggesting that the tight labor market is putting pressure on inflation, the yield on the benchmark 10-year government note saw its biggest single-day jump in four months, to 2.852%.
Surging yields were, in fact, also a factor in the drop in stock prices.
The Federal Reserve Board has been trying for years to boost the rate of inflation to 2%. Yet now that inflation appears to be rising, markets are spooked by it.
So there’s plenty to worry about, but let’s do our best to enjoy the improving economy. If improvement continues, it’s likely to give stock prices another boost.