Is the Weak Jobs Report Foretelling a Recession?

June 5, 2016 — Sam H. Fawaz

In case you hadn’t heard on Friday, the Bureau of Labor Statistics (BLS) Employment Report for the month of May was disappointing.  Economists who follow job growth in the U.S. economy were expecting 123,000 new jobs to be created.  The actual number, according to the BLS, was 38,000—the smallest gain since September of 2010.

What’s going on?  On a scale of 1 to Lehman, how worried should we be?  Is an 85,000 shortfall in job growth, in a single month, telling us that the U.S. economy is about to plunge into a deep recession? The short answer is no.

CA - 2016-6-3 - That Jobs Report

As it turns out, the investment markets largely shrugged off the surprising number—for a variety of reasons.  First of all, a strike affecting 35,000 Verizon employees was somehow factored into the data, so unless all the striking workers are never coming back to work, a real count would have put the job-adding number at around 73,000.  Second, the employment data comes with a huge asterisk: these are estimates with a margin of error of 100,000 jobs.  That means we won’t actually know how many jobs were created until sometime in the future. There are at least two revisions to be made in the future.

Third: despite the low job creation figure, the Bureau of Labor Statistics also told us that the unemployment rate is dropping, currently to 4.7%, the lowest rate since November 2007.  How can that be?  BLS statistics say that people are leaving the workforce at a faster rate than previously, but the economy has also been adding 180,000 to 200,000 jobs almost every month for the past five years.  Is it possible that it has finally given a job to most of the people who want one?

As evidence, the BLS has reported that hourly earnings by workers are up 3.2% for the first five months of 2016, which suggests that workers have a bit more pricing power than they did, say, last year.  That suggests that we are experiencing a tighter labor market, not one where jobs are falling off the table and many people are too discouraged to apply for a job.

Finally, the uncertainty over jobs has almost certainly delayed the rise in interest rates that had, before the report, been widely expected from the U.S. Federal Reserve Board in June or July.  You can expect the Fed to be more cautious about adding any costs to the economy until its economists can get a handle on what that odd job statistic means for the overall health of U.S. businesses.  That would give the economy a slight boost, and might lead to higher jobs growth figures in the future.

So how much did Friday’s employment news change the fundamental picture of economic growth or the prospects for stocks?

Not very much.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

Sources:

Wall Street Stunned!

http://www.businessinsider.com/wall-street-on-may-2016-jobs-report-2016-6

http://www.businessinsider.com/us-jobs-report-may-2016-2016-6

http://www.forbes.com/sites/samanthasharf/2016/06/03/jobs-report-u-s-adds-just-38000-jobs-in-may-unemployment-rate-down-to-4-7/?linkId=25155735#22a015b216da

https://www.washingtonpost.com/news/wonk/wp/2016/06/03/what-just-happened-with-jobs-in-america/?tid=sm_tw

http://www.ft.com/fastft/2016/06/03/us-markets-shake-off-grim-jobs-report/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

 

 

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What’s Going on in the Markets January 18 2016

January 18, 2016 — Sam H. Fawaz

Wow! There’s no diplomatic way to say this: the global stock markets are in panic mode right now. In two weeks of trading, the U.S. S&P 500 index is down 8% on the year, which brings us close to correction territory (a 10% decline), and has some predicting a bear market (a 20% decline).

On top of that, we’ve been hearing a widely-publicized, rather alarming prediction from Royal Bank of Scotland analyst Andrew Roberts, saying that the global markets “look similar to 2008.” Mr. Roberts is also predicting that technology and automation are set to wipe out half of all jobs in the developed world. If you listen closely out the window, you can almost hear traders shouting “Sell! Head for the exits! We’re all gonna’ die!!!”

When you’re in the middle of so much panic, when people are stampeding in all directions, it’s hard to realize that there is no actual fire in the theater. Yes, oil prices are down around $30 a barrel, and could go lower, which is not exactly terrific news for oil companies and oil services concerns—particularly those who have invested in fracking production. But cheaper energy IS good news for manufacturers and consumers, which is sometimes forgotten in the gloomy forecasts. Chinese stocks and the Chinese economy are showing more signs of weakness, and there are legitimate concerns about the status of junk bonds—that is, high-yield bonds issued by riskier companies with high debt levels, and many developing nations. These bonds have stabilized in the past few weeks, but another Federal Reserve interest rate hike could destabilize them all over again, leading to forced selling and investors taking losses in the dicier corners of the bond market.

If you can think above the shouting and jostling toward the exists, you might take a moment to wonder about some of these panic triggers. Are oil prices going to continue going down forever, or are they near a logical bottom? Is this a time to be selling stocks, or, with prices this low, a better time to be buying? Are China’s recent struggles relevant to the health of your portfolio and the value of the stocks you own?

And what about the RBS analyst who is yelling “Fire!” in the crowded theater? A closer look at Mr. Roberts’ track record shows that he has been predicting disaster, with some regularity, for the past six years—rather incorrectly, as it turns out. In June 2010, when the markets were about to embark on a remarkable five year boom, he wrote that “We cannot stress enough how strongly we believe that a cliff-edge may be around the corner, for the global banking system (particularly in Europe) and for the global economy. Think the unthinkable,” he added, ominously.   (“The unthinkable,” whatever that meant, never happened.)

Again, in July 2012, his analyst report read, in part: “People talk about recovery, but to me we are in a much worse shape than the Great Depression.” Wow! Wasn’t it scary to have lived through, well, a 3.2% economic growth rate in the U.S. the following year? What Great Depression was he talking about?  Taking his advice in the past would have put you on the sidelines for some of the nicest gains in recent stock market history. And it’s interesting to note that one thing Mr. Roberts did NOT predict was the 2008 market meltdown.

Since 1950, the U.S. markets have experienced a decline of between 5% and 10% (the territory we’re in already) in 35.5% of all calendar years—which is another way of saying that this recent draw down is entirely normal. In fact, our markets spend about 55% of the time in this range (pulling back).  One in five years (22.6%) have experienced draw downs of 10-15%, and 17.7% of our last 56 stock market years have seen downturns, at some point in the year, above 20%.

Stocks periodically go on sale because people panic and sell them at just about any price they can get in their rush to the exits, and we are clearly experiencing one of those periods now. Whether this will be one of those 5-10% years or a 20% year, only time will tell. But it’s worth noting that, in the past, every one of those draw downs eventually ended with an even greater upturn and markets testing new record highs.

Many investors apparently believe this is going to be the first time in market history where that isn’t going to happen. The rest of us can stay in our seats and decline to join the panic.

Without a doubt the market picture looks dour, and it’s hard to see red on our screens and declines on our monthly statements. A disciplined approach that takes into account your goals, risk tolerance and time horizon remains the best way to approach when and how you’ll sell. There’s always a better day to sell since strength always returns to markets after a panic. Your patience is always rewarded in the markets, though I acknowledge that it’s easier said than done. If investing in the stock markets was easy, then returns would not be anywhere near as rewarding as they are.

In our client portfolios, we continue to look for opportunities to add to positions in good funds and companies at the appropriate time. We continue to maintain a healthy cash position, and have increased our hedges. While we may see additional selling to start the week (which starts on Tuesday due to the Martin Luther King, Jr. holiday), I suspect that the selling is somewhat exhausted in the short term, so I’m expecting a robust bounce as early as this week (I saw signs of selling exhaustion on Friday January 15). The quality and duration of that bounce will tell us more about what’s to come, and whether more defensive measures are warranted.

Nothing in this note should be construed as investment advice or a recommendation to buy or sell any security. If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://finance.yahoo.com/news/why-the-heck-are-the-markets-tanking-165146322.html

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

http://www.publicfinanceinternational.org/news/2012/07/economic-crisis-%E2%80%98worse-great-depression%E2%80%99

http://blogs.spectator.co.uk/2016/01/the-author-of-the-rbs-sell-everything-note-has-been-predicting-disaster-for-the-last-five-years/

http://www.marquetteassociates.com/Research/Chart-of-the-Week-Posts/Chart-of-the-Week/ArticleID/140/Frequency-and-Magnitude-of-Stock-Market-Corrections

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in American Economy, Financial Planning, General, retirement planning, Stock Market. Tags: , , . Leave a Comment »

Rate Hike Hype

December 15, 2015 — Sam H. Fawaz

While I’m still a tad skeptical, we will almost surely see the U.S. Federal Reserve Board (Fed) start the long process of ending its intrusion into the interest rate markets, by allowing short-term rates to rise starting on Wednesday. It will be the first time the Fed has raised rates since 2006, and for some it will mark the beginning of the final chapter of the Great Recession.

Since 2008, as most of us know, returns on short-term bonds have been at or near zero percent, which is a consequence of the Fed keeping the Federal Funds rate—the rate at which it will lend banks virtually unlimited amounts of money, short-term—at 0.125%. The average Fed Funds rate has historically been 3.5% to 4.0%, so this is a considerable amount of stimulus.

At the same time, the Fed has purchased more than $3.5 trillion worth of Treasury securities and home mortgage pools as part of its quantitative easing (QE) programs, bidding aggressively against much smaller buyers, which is another way of saying: forcing the rates on these bonds down closer to zero.

Pulling back out of these interventions is going to be tricky, in part because shifts in interest rates have a direct impact on a still-fragile U.S. economy (higher rates mean higher borrowing costs, potentially less corporate investment and lower profits), and even trickier because we don’t know how investors will react. In the past, the markets have panicked at the mere mention of a cutback in Fed involvement, and (more recently) have also risen on the same news, presumably because people drew encouragement from the confidence the Fed was showing in the strength and resilience of the U.S. economy.

There are also some tricky mechanical problems. The central bank will try to control the extent that short-term rates rise and fall by raising the interest it pays to banks for the reserves held at the Fed, and also cautiously raising the amount it pays money market funds for short-term trades known as “reverse repurchase agreements.” The mechanics are highly technical and complicated—and still unproven, although there are reports that the Fed has been conducting tests for the past two years.

As the markets react, either upwards or downwards, there are a few things to keep in mind. First, despite the headlines soon to be blaring from every financial section of every newspaper in the country, the rate is expected to move very modestly from .125% to .375%—clearly a small first step in a long journey toward the long-term average. After each step—prominently including this one—the Fed will evaluate the consequences before deciding to make future changes. If the economy slows, or if there are signs that inflation is falling below the Fed’s 2% annual target, it could delay the next move by months or even years. That caution greatly reduces the danger of any kind of serious economic pullback.

It’s also worth noting that the Fed has announced no plans to sell the nearly $4.2 trillion worth of various bonds—including the aforementioned Treasuries and mortgages—that it owns. At the moment, the bank is simply rolling over the portfolio, meaning it reinvests $21 billion a month as bonds mature. Eventually, most observers expect the reinvestment to stop and the Fed to allow the huge bond holdings to mature and fall off of its balance sheet. The fact that this is not being done currently reflects the exquisite degree of caution among Fed policymakers, who don’t want to rock the boat too fast or too hard.

Finally, some have wondered about the future of mortgage interest rates as the Fed begins a cautious exit from the bond markets. Interestingly, recent history shows that mortgages haven’t been especially influenced by changes in the benchmark rate. The last time we saw extremely low interest rates, after the tech bubble burst in the early 2000’s, the Fed brought its Fed funds rate down to 1%. It began raising rates by 0.25% a quarter starting in the summer of 2004, but over the next four months, the 30-year fixed-rate mortgage actually fell from 6.3% to 5.58%. By the time of the last increase in the summer of 2006, mortgage rates were running at 6.68%, just a half-percent higher than they had been at the previous Fed funds rate low.

Nobody knows exactly what to expect when the announcement comes on Wednesday, but you can look for the investment markets to bounce around a bit more than usual, and economists—including the teams employed by the Fed—to examine every scrap of data about the impact on the economy over the next quarter. At that time, Fed policymakers will face another decision, and there is no reason to expect them to be less cautious than they have been recently. For many of us, the rate rise should be reason for celebration, a sign that the long recession and period of economic uncertainty is finally starting—carefully—to be put in our rear view mirror.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

https://www.washingtonpost.com/news/where-we-live/wp/2015/12/14/what-a-fed-rate-hike-could-mean-to-mortgage-borrowers/

https://www.washingtonpost.com/news/wonk/wp/2015/12/14/the-federal-reserve-will-likely-raise-interest-rates-this-week-this-is-what-happens-next/

http://www.usatoday.com/story/money/2015/12/14/this-week-december-13/77155714/

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Posted in American Economy, Financial Planning, General, investing, retirement planning, Stock Market. Tags: , , , . Leave a Comment »

Is America in Decline?

March 7, 2015 — Sam H. Fawaz

In 1945, the U.S. made up more than half of the world’s total gross domestic product (GDP), which basically means that half the world’s economy took place inside U.S. borders. Today that figure is just under 22%.

Does that mean America is in decline?

There seems to be a bull market in doomsayers these past few years, as we’re all reading arguments that the U.S. is slowly losing its grip on global preeminence. The rhetoric today sounds a lot like the hand-wringing back in the 1980s when Japan was allegedly taking over the global economy, and before that, when the Soviet Union had more missiles and a Sputnik circling over our heads.

There’s no easy way to define the overall quality of an economy, but probably the most thorough assessment comes out each year via the World Economic Forum’s Global Competitiveness Rankings. The most recent report ranked 144 countries around the world, including Qatar (16), Moldavia (82), Namibia (88), Lesotho (107) and the unhappy states of Chad (143) and Guinea (144), whose citizens eke out their lives on per capita incomes of $1,218 and $564 a year, respectively.

The survey looks at 12 “pillars” of economic competitiveness, including labor market efficiency, the quality of primary education and higher education, infrastructure, the strength of institutions, innovation, business sophistication, technological readiness and the sophistication of the financial markets. Each of these categories are broken down into dozens of subcategories, which are separately evaluated. For instance, when looking at the strength of each country’s public institutions, the World Economic Forum researchers consider whether people in a given country have strong property rights and intellectual property protection, whether there is corruption and the routine payment of bribes, whether the citizens enjoy judicial independence and a solid legal framework, and how well investors enjoy shareholder protection.

In the most recent survey, the U.S. ranked third overall, with an overall rating of 5.5 on a scale of 1-6. Ahead of it were Switzerland (5.7) and Singapore (5.6). China, the country that you most often hear cited as the all-powerful up-and-coming economy, ranked 28th, two rungs below Saudi Arabia, one rung above Estonia. Brazil and India, which are sometimes mentioned as powerful competitors to U.S. economic hegemony, are ranked 57th and 71st, respectively.

The point of the rankings is to show which countries have created the healthiest (or, in the cases of Chad and Guinea, the least-healthy) economic climate for future growth. But of course there are other ways of measuring competitiveness, including the bottom line (as mentioned at the top of the article) of percentage of the world GDP, and whether you’re moving up or down.

US and Global GDP through 2014

By that standard, the U.S. is indeed moving down. If you look at Figure 1 above, which shows the size of the overall global and U.S. economies since 1991, you see that the U.S. has enjoyed steady economic growth, while the world at large has essentially taken off like a rocket. The years following the collapse of the Soviet Union, when several billion people were suddenly allowed to become capitalists, have been good for world growth. When China shifted from a communist to a capitalist economic posture, this added fuel to the rocket. The democratization of computer technology and the global Internet has empowered value creators everywhere.

The U.S., Europe and Japan, in other words, no longer have a monopoly on capitalism. And that’s a good thing.

Is there a better way of evaluating how the U.S. economy is holding up in an increasingly competitive world? Figure 2 below looks at the first chart from a slightly different angle. Since 1991, what percentage of all the world’s business has been happening in the U.S., vs. Europe, Japan, China, India, Russia and Brazil?   How much of the total global economy did each nation claim in each year, and how has that balance changed over time?

US GDP Market Share through 2014

What you see there is that the U.S. is still in the lead by a pretty wide margin, and in recent years has actually stabilized its percentage of total global GDP. The decline has come mostly because a lot of smaller emerging markets, plus China and, to a certain extent, Brazil, India and Russia, have all been growing. At the same time, America’s traditional competitors—Europe and Japan—have been sinking. If you want to point a finger at decline, perhaps that’s a better direction than the U.S.

Does the U.S. face economic challenges? Of course. Is our political system a mess? Sure. Could things be better? Certainly. But if you sift through a lot of variables with a fine-toothed comb, you discover that the U.S. has created a better environment to grow and prosper than almost anywhere else, and it has held its own with the roaring growth of the emerging markets while the other developed nations are losing ground. More than a fifth of all economic activity still happens in the U.S., and the long, slow decline in that figure is not due to stagnation at home, but abundant growth all around the world. That’s not something to worry about; it’s something we should be celebrating.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://reports.weforum.org/global-competitiveness-report-2014-2015/rankings/

http://www.economywatch.com/economic-statistics/year/1990/

http://theamericanscene.com/2008/05/07/a-post-american-world

TheMoneyGeek thanks guest writer Bob Veres for writing this post.

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