Searching for Goldilocks

Watching the stock market these days is very easy, but also very frustrating. Good news is bad news and vice versa. Case in point was Friday’s employment report. Nonfarm payrolls increased by 372,000 in June, well above the 250,000 Street estimate and the unemployment rate remained at 3.6%. What was the reaction to this good news? Stocks dropped and bond yields rose. Go figure.

The chart below shows where the increases originated, primarily in services, which coincides with our view that the ‘goods’ inflation we’ve experienced is beginning to wane. But the services side was quite strong, especially in leisure and hospitality, which implies that the consumer is still spending, despite higher prices.

The essential problem is that markets… all markets… are desirous of a Goldilocks scenario. Economic data that is too strong, like Friday’s employment data, implies that the Fed will continue to raise rates. That increases the chance that they raise rates too much, creating a recession. By the same token, economic data that is too weak, implies that the Fed will ease up on rate increases too quickly. That risks stagflation (slow economic growth with inflation). Everyone wants the data to be ‘just right’. Not too hot, and not too cold: the Goldilocks economic scenario.

The promise of Goldilocks economic conditions is a scenario that corrects inflation, without causing the economic pain of a recession. Surely, this is the proper target for the Fed, but one that has a low probability, as we’ve discussed many times. The gyrations you are seeing in markets each day are largely a function of the data flow. Our suggestion is not to get too caught up in the daily gyrations and focus on the longer-term. This is why PWM employs well diversified portfolios, seeking to mitigate short-term portfolio gyration while keeping our eye on the long-term objectives.

Did you notice the change?

In the midst of all the market gyrations over the last several months, there has been one very important change that has gone largely overlooked: the growing attractiveness of bonds. As interest rates rose over the last several months, the bond market was pounded, producing the worst start to a year for the traditional 60% stock/40% bond portfolio since 1970.

What does that mean for valuations? First and foremost, it implies that bond valuations, which have been extremely high for a long time, are now very competitive with stocks. The relative attractiveness of bonds versus stocks has improved in a meaningful way. The chart below shows the yield of the 10-year Treasury note and the dividend yield of the S&P 500 going back to 2009. The yield on the Treasury note in excess of the S&P 500 reached 1.36%, which is the largest it has been since 2010. It may be that both stocks and bonds remain overvalued, but the relative attractiveness of bonds should be getting more attention.


What We’re Reading

Record Share of New-Car Shoppers Jumped Into a $1,000+ Mo. Payment

China weighs $220 billion stimulus package

US Pandemic Checks Had No Lasting Impact on Poor

Boris Johnson: World reacts as UK PM resigns

How Low Can the Euro Go?

Japan lawmakers, business leaders mourn fatal shooting of ex-PM Abe

Americans involuntarily working part-time falls to lowest level in 21 years

Stocks making the biggest moves Friday: Upstart, WD-40, Vita Coco          

(The poor WD-40 earnings is a potential harbinger of more inflation and foreign exchange pressure in the second quarter.)



Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

, , , , , , , , , , , , , ,

Articles, General News, Weekly Commentary

By: Adam