War in Europe and the middle east, rising oil prices, inflation, rising interest rates, political polarization…there is plenty to worry about in the world. Despite all the negatives, the stock market rose this week as a little bit of good news spurred a relief rally in both stocks and bonds. Here is a summary of the good news that kicked off the rally.
The rally began on Wednesday when the Treasury Department announced they would issue less debt than the market expected, causing interest rates to stop their upward march. The 10-year treasury yield, a key benchmark for interest rates, fell from 4.9% on Tuesday to 4.7% by market close on Wednesday. By Friday afternoon the 10-year Treasury rate had fallen to 4.5%.
Several key pieces of economic news reinforced the rally by showing signs falling inflation pressure. First, weaker than expected employment reports from ADP, a major payroll provider, signaling that the jobs market may be cooling. Next, the Manufacturing Purchasing Managers Index (M-PMI), a measure manufacturing activity, fell. While it may be counterintuitive that a weak jobs report and a weak manufacturing report would cause a market rally, both reports were good news to the market because they signaled reduced pressure on inflation, which is still a driving factor for both the stock and bond markets.
Thursday brought more good news as the rally was boosted by the 3rd quarter productivity report showing a 4.7% jump in productivity in the 3rd quarter and a 2.2% productivity increase year over year. If you are wondering why a good productivity report can be good news to stocks while a bad jobs report can be good news for stock, the answer is that productivity is ‘free’ economic growth. Productivity is the elixir that makes capitalism work and increases the well-being of both workers and stockholders. If every worker is more productive it means that companies can pay workers more without hurting corporate profitability or raising prices. Usually rising productivity means that wages can rise, and profits can rise without inflation, making everyone better off. For example, hourly compensation rose 3.9% during Q3 but productivity rose 4.7%, resulting in a 0.8% drop in Unit Labor Costs for companies – it’s a win-win that actually takes the pressure off inflation.
It is still too early to tell if the rally will continue, but we are encouraged by these key economic indicators that show falling interest rates and inflation pressures, and we will take the relief rally. Now, if we could resolve the current conflicts in Europe and the Middle East, that would certainly be good news!