Market Perspective for May 8, 2015

Stocks secured gains for the week on Friday after the jobs report helped send interest rates lower. Financials were the big sector winner this week thanks to those higher rates, and that benefited the Dow Jones Industrial Index, which increased 1.97 percent. The S&P 500 Index climbed 1.47 percent, while the Nasdaq rallied 1.26 percent. The Russell 2000 increased 1.21 percent on the week.

In April, the economy created a net 223,000 new jobs. The unemployment rate fell to 5.4 percent, its lowest level since the 2008 financial crisis. This is a good number as far as the stock market is concerned; stronger job growth that would warrant higher interest rates sooner rather than later. Conversely, a weaker number would have shocked the market. In between is just right: an economy growing fast enough to handle rate hikes sometime in the future, but far enough down the road so it is not an immediate concern for investors.

The main economic story of the week was the rise in long-term interest rates, a market that the Federal Reserve doesn’t control. The 10-year Treasury bond has climbed for nearly three weeks, rallying from a low of 1.85 percent to a high of 2.25 percent on Wednesday, before falling to 2.10 percent on Friday. It appears this short-term move has ended and the reversal may carry into next week. Crude oil prices matched the rise in interest rates step for step until Friday. Oil prices hit a high above $61 a barrel on Wednesday before pulling back to $59 on Friday. As noted, financials benefited from the move in rates. iShares US Regional Banks (IAT) gained 1.57 percent. The insurance market performed even better, gaining 2.39 percent. Energy wasn’t as fortunate: SPDR Energy (XLE) fell 1.11 percent despite higher oil prices.

More important than the move in Treasuries was the rising yield on German bonds. German 10-year bonds, yielding 0.05 percent risked falling to zero. They rallied and hit 0.78 percent intraday on Thursday, which was one of the biggest moves for German bonds since reunification. The moves came amid developments in the never-ending Greek debt tragedy. There have been so many moments that could have been the end of the line for Greece, but the end game may finally be approaching.

Rising interest rates weighed on the broader market for much of this this week, but some subsectors enjoyed strong rallies.  Biotechnology stocks, measured by iShares Nasdaq Biotechnology (IBB), rallied 5.5 percent on the week. In contrast, Guggenheim Solar (TAN) was down coming into Friday and then erased its losses for the week with a 3.16 percent rally today.

Aside from rising interest rates, investors also overcame the jawboning from Fed Chair Yellen. In public comments this week, she said that stock prices were “quite high.” Last summer, she made similar comments about some leading sectors such as social media and small biotechnology stocks, the latter of which have been in a strong rally ever since. Fed Chairs are notoriously poor at market timing and spotting bubbles, and we doubt this time will be any different.

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