Job market good news, bad news

Weekly applications for jobless benefits fell to another of the lowest levels since 2007. In addition, layoffs in May fell to levels not seen since prior to the 2007/08 recession.  

What’s the point? There is no question that the health of the job market in the U.S. is improving significantly. This improvement is a “two-edged sword” for the financial markets. The “good news” is it supports the outlook for an improving economy which, in turn, is positive for corporate profit growth. Corporate profit growth is the primary driver of stock prices. The “bad news” for the financial markets is that a stronger economy a) increases inflation potential and b) may force the Fed to act more quickly to raise interest rates.  These factors would most likely be viewed negatively by the financial markets and place further near-term pressure on stocks. There is good news though: a) even if inflation does pick up a bit, we don’t expect it to be severe or damaging-style inflation that was experienced in the 1970s; and b) in the majority of rising (interest) rate cycles over the past 50 years, stocks have risen due to rising corporate profits. The one exception to this was the 1970s “stagflation” period, in which the combination of super high inflation and rising rates overwhelmed stock valuations. So it is important to remember rising interest rates should not end the bull market as long as investors believe inflation remains moderate.

Link: http://money.msn.com/business-news/article.aspx?feed=AP&date=20140710&id=17764577