Quote of the Week
“Things turn out best for the people who make the best out of the way things turn out.” – Art Linkletter
Equifax and Strange Bedfellows
Last week was down with the Dow Jones down 0.86% and the S&P500 off 0.61%. The markets today (Monday) have rallied strongly with the Dow up 1.19% and the S&P 500 up 1.08%. I think the reason for the markets going up today were twofold.
First, Hurricane Irma appears not to be as bad as forecasted. Secondly, President Trump and the minority leaders of the Senate and the House, Chuck Schumer and Nancy Pelosi, agreed to a package deal to stave off a federal government shutdown and a default by Uncle Sam, while producing a down payment for Harvey hurricane relief without input from the President’s presumed Republican allies.
The message according to Greg Valliere, the chief strategist of Horizon Investments, will be the surge of new spending. The belief is that tax cuts and infrastructure spending that lose money are acceptable if they stimulate economic growth. We shall see.
As most of you are aware, Equifax suffered a 143-million-person security breach. Oops! They say that you can go to their website to see if you are in the group. Wrong. I went to their website, and there is no easy way to find out. Thanks to Sue who is the “queen of knowing everything important” doing some research, she discovered the actual website where you type in your last name and the last six digits of your social security number to see if you might be impacted. The web address is https://trustedidpremier.com/eligibility/eligibility.html. I could not find that address anywhere on their website. Thank you, Sue. By the way, I was impacted, so I signed up for their free year of credit monitoring. The best thing you can do for yourself is to check your bank and credit card statements for suspicious activity.
The UPI (Upward Potential Indicator) is still at a respectable 37 out of 100. There are no indications of a recession on the horizon. Our allocation remains the same for most investors: 65% equities, 0% bonds, 30% alternatives, and 5% cash. We are considering increasing our equity exposure and decreasing our allocation to alternatives. We will let you know.
Is the Fed Doing Its Job?
Let’s talk about the Federal Reserve’s “dual mandate” from Congress. It’s a phrase that gets thrown around a lot, so it is worth analyzing.
The Federal Reserve Act of 1913 established the central bank as we know it today, and, later, Congress also charged (mandated, if you will) the institution to promote maximum employment as well as stable prices, thus the dual mandate. This has proven to be a difficult, if not impossible task.
In 2012 for the first time in its history, the Fed established an inflation target. Even after trillions of dollars in quantitative easing and years of zero interest rate policy, that target of 2% is yet to be met.
The Fed seems perfectly happy with itself because the unemployment rate has fallen to historically low levels at 4.4%. Job creation appears to be moving at a healthy pace, but wages are not rising. In fact, the August jobs data only showed a 0.1% month-over-month increase in hourly earnings and a meager 2.5% year-over-year gain. There is no getting around that wage growth was a disappointment once again.
The Bureau of Labor Statistics (BLS) model assumes an increase in new entrepreneurship and associated jobs. The BLS also fails to account for part-time employment and contract jobs that replaced full-time jobs. Meanwhile, the labor force participation rate has been falling for the last 17 years and hasn’t been this low since the Carter administration. The participation rate is a measure of the active portion of an economy’s labor force. It refers to the number of people who are either employed or are actively looking for work. This statistic tells us how many people over the age of 16 have jobs.
Take a look at the chart below. The left axis is the unemployment rate illustrated in red, and the right axis is the labor participation rate in blue.
It is pretty obvious that if the number of people working has decreased and the population has increased, the employment picture really is not all that good looking. If the jobs picture is as weak as the participation rate says it is, it is no wonder wages aren’t rising as they should. And that might explain why inflation is so stubbornly low.
Is the Fed really focused on jobs and inflation as per its dual mandate? Have the trillions of dollars the Fed spent on quantitative easing and bailing out banks generated jobs, fueled economic growth, and inflated prices? Or, have its policies just propped up financial assets and bank profits? I will let you draw your own conclusion.
By the Numbers –
“LESS FROM THERE – The USA imports 22% less oil than it did just a decade ago. Oil imports averaged 7.9 million barrels a day in 2016, down from 10.1 million barrels a day in 2006 (source: Department of Energy).” – Michael A. Higley, BTN 09-11-2017
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These are the opinions of Larry Lof and Stephanie Mayoral and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Past performance is not indicative of future results. Due to our compliance review process, delayed dissemination of this commentary occurs. The S&P 500 is an index of stocks compiled by Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Indices mentioned are unmanaged and cannot be invested into directly.Technical analysis represents an observation of past performance and trend, and past performance and trend are no guarantee of future performance, price, or trend. The price movements within capital markets cannot be guaranteed and always remain uncertain. The allocation discussed herein is not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. Please consult an advisor to discuss your individual situation before making any investments decision. Investing in securities involves risk of loss. Further, depending on the different types of investments, there may be varying degrees of risk including loss of original principal.