By Mickey Welcher
Strange as it may sound, last Friday’s job report came in below expectations, and it’s actually a good thing if you’re in the stock market. That’s because the Fed is using the unemployment figures as a key determinant for raising interest rates. Given last week’s news on the state of the U.S. workforce, a September hike is likely off the table.
We’re witnessing a really interesting environment where the stock market is reacting well to BAD news. In reality, we should all be rooting for the unemployment rate to continue going down. When jobs are being created, companies are doing well, business is strong and the outlook is even better. This will mean a rise in corporate earnings that, in turn, will be reflected in an increase in business values that normally translates to a higher stock prices. The opposite typically occurs when jobs are not created at the level economists anticipate.
So why is this not happening today? Simple — investors have nowhere else to put their money right now other than stocks. With the Fed keeping interest rates low, bond yields are at rock bottom levels and certificates of deposit as well as savings accounts are also paying little to no returns. That makes stocks the only option for investors. The more money being put in stocks, the more demand rises and prices follow suit.
What that means is that we’re in a market where stocks are becoming overpriced. Once rates start to increase, we could see investors sell some shares and move back to bonds. How much of a correction we’ll see — let alone when we’ll see it — is anyone’s guess. If the next jobs report comes in weak, any rate increases are almost certainly off the table for the rest of 2016.
Make no mistake though. At some point, they will rise.
So my advice to investors is this: Stay the course. Keep your portfolio asset allocation balanced and don’t panic when the market eventually does hit a correction. While it may look like bad news when it happens, it’s actually cause for celebration.
Mickey Welcher is founder of Envestim, a low-cost financial advisory firm for anyone looking to start or manage their portfolio. He can be reached at firstname.lastname@example.org.