A Spicy Week on Wall Street
Weekly Investment Update | By Brian Schreiner
Last week was a spicy one on Wall Street. Stocks were down, bond prices were up, commodities were flat, the price of gold was higher and bitcoin was lower.
U.S. stock indexes posted losses in what ended as the worst week for some indexes since the tariff-driven sell-off in early April.
Job growth slowed in July and numbers for May and June were revised “stunningly” lower. Trump fired the head of the Bureau of Labor Statistics (BLS) and hiked tariffs. Earnings reports were mixed, inflation accelerated and there was high drama at the Federal Reserve.
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The July jobs report shows a deteriorating labor market. On Friday, the Labor Department reported that the U.S. economy added only 73,000 jobs in July, well below consensus estimates for a gain of around 115,000. The readings for May and June were also revised down, removing nearly 260,000 jobs. May was revised down by 125,000, from +144,000 to +19,000 and June was revised down by 133,000, from +147,000 to +14,000.
Following the report, President Trump fired the commissioner of the BLS. This morning there was a spicy debate on CNBC about whether the firing matters. In my view, the firing doesn’t matter but does nothing to address the real question: Why can’t the government provide more accurate data? Jeremy Siegel addressed this question in an interview this morning.
Employment growth in the past 3 months has averaged just 35,000 jobs, the worst 3-month span since the covid pandemic. Nearly all new job growth since covid has been in two sectors: government and health care - not exactly what you’d expect from a booming economy. And prior to Trump taking office, all new job growth was accounted for by foreign workers. Since Trump has taken office, jobs growth for foreign-born workers has declined four months in a row.
Earnings reports were in focus last week. According to data from FactSet, of the 66% of S&P 500 companies that have reported through Friday morning, 82% have beaten consensus earnings estimates, with a blended earnings growth rate of 10.3%. However, several companies warned that tariff headwinds are weighing on their businesses, including Ford Motor, which said it expects tariffs to cost the company $2 billion this year.
Speaking of tariffs, Trump officially increased them on Thursday evening to between 10% to 40% on nearly every global trading partner. The rates were formally authorized by executive order (click for complete list of countries/tariffs) and go into effect on Thursday. Tariffs on goods and services are ultimately paid by the consumer. They are a tax; and because they increase prices, tariffs are inflationary.
Inflation picked up in June, according to the Bureau of Economic Analysis (BEA). The BEA’s core personal consumption expenditures (PCE) index, which is also the Fed’s preferred measure of inflation, rose 0.3% month over month in June, an increase from May’s reading of 0.2%. On a year-over-year basis, prices rose 2.8%, remaining solidly ahead of the Fed’s long-term inflation target of 2%.
The BEA also reported that the U.S. economy grew at an annualized rate of 3% in the second quarter but analysts pointed to the reversal of a tariff-related import surge that caused output to shrink early this year. Consumer spending and business investment increased modestly and growth is projected to slow in the second half of the year as companies start to push the cost of tariffs to consumers.
The Federal Reserve concluded its July monetary policy meeting on Wednesday and maintained its target policy rate at a range of 4.25% to 4.50%. In a spicy turn of events, two Fed governors dissented, preferring to immediately lower rates by a quarter point. This was the first time in more than 30 years that two Fed governors dissented from a decision about rates. The last time was in 1993.
Danielle DiMartino Booth, who worked at the Fed for nine years, gave an interesting account of the drama that went on last week at the Central Bank. Evidently, there were probably at least three governors who wanted to dissent (i.e. vote for an interest rate cut), but somehow Powell and his colleagues persuaded them to vote with the majority.
The dissents were leaked the night before, ahead of the official announcement. One Fed Governor missed the meeting and Powell may have been forced to change the official statement to appease a single Committee Member.
“I don't think that they would have changed the language of the statement unless they were appeasing somebody… My guess is that Austin Goolsbee, who is president of the Chicago Fed, had to be bound-and-gagged to not dissent and for there to not be a triple descent today. Otherwise, they wouldn't have had to soften the language to acknowledge the slowdown in growth. This was a spicy FOMC!” said DiMartino Booth.
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