Today’s U.S. payroll data for the month of February surprised on the upside with 295,000 jobs created versus expectations of 240,000 and versus 257,000 in January. This is good news for our economy, yet the initial market reaction is negative. Stocks in the U.S. are selling off about 1% so far today and the benchmark U.S. Treasury 10-year bond is also selling off about 1% in price as yields climb. The Euro is also down about 1% vs. the U.S. dollar in today’s trading.
This is all part of the global market’s concern about when the Federal Reserve begins to increase short-term rates as recognition that the U.S. economy is growing sufficiently well to accept higher policy rates (remember, U.S. short-term policy rates have been about zero since the 2008-2009 credit crisis). Higher interest rates can be a challenge for stock prices in the U.S., so the market reacts negatively. Higher interest rates cause bond prices to fall. And higher interest rates in the U.S. versus other economies should be expected to drive the U.S. dollar higher against those currencies, so foreign currencies decline.
What is an investor to do? We prescribe (1) a healthy allocation to foreign stocks as their central banks continue to stimulate, (2) a currency hedge to protect against currency weakness in those foreign economies, and (3) short-term U.S. bonds to protect against rising yields.
No prescription is perfect, and certainly that is the case here. But, you evaluate the situation, and come up with what seems best. In our opinion, more good economic news in the U.S. may likely make this prescription more attractive to investors.
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No forecast can be guaranteed. The views expressed are those of the Payne Wealth Partners Investment Committee and are subject to change at any time. These views are for informational purposes and should not be relied upon as a recommendation or solicitation or as investment advice.