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A paradox: US stocks fall even as the economy strengthens

Russ Koesterich, CFA of BlackRock

With US volatility on the upswing, take a look at Asia (Part 3 of 5)

(Continued from Part 2)

Ironically, the sell-off occurred in a week that brought the release of a string of positive economic news, not the least of which was a strong gross domestic product report for the second quarter. The July employment data also showed more than 200,000 net new jobs were added for the sixth straight month, further confirming that the United States has fully recovered from the first quarter’s economic contraction.

Market Realist – The graph above shows the U.S. GDP growth rates from 2012 to 2014. According to government statistics, the U.S. gross domestic product grew at a 4% annual pace in the second quarter, re-affirming the Federal Reserve’s opinion that contraction in the first quarter was of a transitory nature.

According to data by the U.S. employment report, fewer Americans sought unemployment insurance benefits in July compared to any other time in the past eight years. This shows that employers are retaining workers in the wake of growing demand.

According to the Labor Department, the economy added 209,000 jobs in July 2014 outside the farming sector. The economy has been steadily generating 200,000 jobs each month over the past six months. This trend is a first since 1997.

According to the employment report, the hiring was particularly strong in the professional, construction, and manufacturing sectors. This is a significant statistic, given that all these sectors pay more wages than the national average.

The positive economic news has renewed concerns that the Federal Reserve may raise interest rates sooner than expected. This led to a rise in yields for Treasuries (TLT), as prices fell in response to the news. Ten-year Treasury bonds (IEF) showed an increase in yield of 6 basis points in one day to stand at 2.5%. Yields spiked for all bonds. But shorter-duration bonds (SHY) were significantly affected. U.S. two-year Treasury notes showed an increase in yields 0.59%.

U.S. equities (SPY)(IVV) fell sharply in the last week despite the good news flooding in. Gold (IAU) increased as investors fled to the traditionally considered safe haven asset amid growing concerns of rising rates.

The September oil (BNO) futures on the New York mercantile exchange fell 0.8% to $97.35 per barrel, whereas the December gold futures rose 1% to $1,295.10 per troy ounce on August 1, 2014.

Read on to the next part of this series to see how geopolitical risk and soft earnings overshadowed positive economic reports.

Continue to Part 4

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