Each month, our advisors engage in direct conversations with clients regarding the evolving economic environment and its impact on their financial goals. Below, we examine the primary topics that defined our discussions throughout July and August. We hope this overview enhances your understanding of current market movements, central bank policy, and overall portfolio positioning.

Friday's job report was negative (the economy lost jobs for the month). What does this mean for the economy?

Thanks for your question about what the latest jobs report means for the economy and financial markets. The monthly jobs report is one of the most closely watched economic indicators because it tells us how many people are finding work and how healthy the labor market is. This can have ripple effects across growth, inflation, and Federal Reserve policy.

Here are some key factors to consider:

1. The latest jobs report for July showed that payrolls fell by -23,000, well below the consensus forecast of +80,000 new jobs. Investors typically expect positive job gains each month, so it can be surprising when we see a negative number. There are many details across sectors and technical factors such as seasonal adjustments. At the same time, the overall economy is still healthy, so it's important not to overreact to a single month's numbers.

2. The unemployment rate improved slightly to 4.1%, in large part because the labor force participation rate dropped to 61.4%. So while job gains slowed in July, fewer people are actively looking for work, which means that overall unemployment actually improved. This can seem confusing and is due to the way the unemployment rate is calculated, which makes it harder to interpret whether the jobs figures are truly positive.

3. The broader labor market has been softening for some time due to these labor supply trends, especially with slower immigration. The economy has averaged only about 60,000 job gains per month this year, after a strong period in March and April. This is also consistent with GDP growth decelerating to 1.5% in the second quarter, and productivity which slowed to 1.4%. Again, these numbers are still positive, just slower.

4. The biggest question for investors is how this might impact a potential Fed rate hike in the coming months. Higher inflation means the Fed ought to raise rates, while a weakening job market would usually mean a rate cut. This jobs miss has led to a shift in market probabilities, with investors now expecting the Fed’s next rate hike to come in December rather than October, and no further hikes expected through 2027. It's important to remember that these expectations can shift quickly, especially as the growth and inflation outlook changes.

The included chart on payrolls shows the magnitude of job gains over the past several years, and how they have slowed more recently.

While a single weak jobs report can cause short-term market volatility, long-term investors are best served by staying focused on the broader economic cycle and remembering that markets have historically navigated periods of labor market weakness and continued to grow over time.

I'm reading about the Japanese Yen. There seems to be concern over the U.S. intervening to support the Japanese Yen. Will this cause problems for our economy?

Thanks for the important question about U.S. intervention in currency markets to support the Japanese yen. Policy moves like this are somewhat unusual and are typically related to underlying financial market and economic conditions. This means it's important to understand why the U.S. did this in the right context.

Here are some key points to consider:

1. The U.S. recently helped Japan intervene in the yen market for the first time since 1998. The yen had fallen to its lowest value in 40 years due to factors such as slow growth, high debt levels, and pressures from oil imports, in addition to shorter-term trading factors. Typically, Japan would need to sell assets such as U.S. Treasury securities to raise dollars which they could then use to shore up the yen.

2. However, by selling Treasury securities, this would raise U.S. interest rates. To avoid this, the U.S. stepped in to effectively lend Japan the dollars to support the yen. They did so by having the Federal Reserve expand its balance sheet and provide a repo facility backed by those Treasury securities, on the order of $60 billion. This was done to avoid Japan selling these securities on the open market.

3. Of course, there is no free lunch when it comes to financial markets. U.S. interest rates still rose over this period, with longer-term 10-year and 30-year rates at their highest levels in years. However, since this financing arrangement is meant to be temporary, the goal is for markets not to view this as a permanent increase in the Fed balance sheet. Expanding the balance sheet would typically loosen monetary policy at a time when the Fed has been expecting to tighten it.

4. This is also not just about interest rate levels. The financial system can experience significant volatility when there are large swings in global interest rates and currencies. A related situation last occurred in 2024 around the Japanese yen "carry trade," which involves investors borrowing in yen at low rates and investing in higher-yielding assets like U.S. Treasury securities. The rapid unwinding of these trades can create instability.

The included chart on U.S. versus Japan interest rates is directly relevant here, as the wide gap between the two countries' rates is at the heart of the carry trade dynamic and the Bank of Japan's goal of supporting the yen.

While currency interventions can create short-term uncertainty, staying focused on long-term investment fundamentals remains the most reliable path to achieving financial goals.

What is driving the recent S&P 500 record highs, and how are earnings impacting market valuations?

Thanks for the timely question on the current earnings season. Corporate earnings are one of the most important drivers of stock prices in the long run, and understanding the growth rates companies are reporting helps investors gauge the overall health of financial markets.

Here are some key points to consider:

1. This has been a strong earnings season for corporate America. According to FactSet, over 85% of companies have beaten earnings expectations across many sectors. LSEG data shows that consensus forecasts anticipate S&P 500 earnings per share to reach $340 this year, representing a historically strong growth rate that could approach 30%.

2. Of course, these expectations can change quickly as new developments occur. So far, many sectors are contributing, including Energy due to higher oil prices, Financials due to interest rates and healthy growth, and technology-related sectors due to AI trends such as data center buildouts.

3. While earnings reports are quarterly events, they matter most in the long run. This is because one of the fundamental benefits of owning stocks is that they entitle you to a share of a company's earnings. Over longer periods, the stock market is supported by earnings growth, which in turn is supported by economic trends.

4. These trends have helped the S&P 500 reach about 25 new record highs this year. However, it's important to also pay attention to valuations, which take both prices and earnings into account. The current S&P 500 price-to-earnings ratio has fallen slightly to 19.2x as earnings have grown, but is still well above the historical average of 16x, meaning the stock market is priced at a premium relative to history. It's important to stay balanced while still benefiting from this growth.

The chart shows corporate earnings growth and its relationship to the stock market over time, illustrating how earnings have historically been a key engine of long-term returns.

So, while these strong earnings trends are positive for markets and investors, it's important to stay balanced. The most successful investors tend to focus on the bigger picture, trusting that patient, long-term investing through various market cycles is the most reliable path to building wealth.