Workin’ for a Livin’
Happy Labor Day! With the holiday upon us it has most likely evoked thoughts regarding the end of summer, start of school, and the beginning of football season. Even though Labor Day has its roots imbedded with organized labor when it became a federal holiday in 1894, the recognition of the day is about all working people. Therefore, what may also come to mind is the term “work” since spending time at jobs encompasses a large portion of waking hours for most American adults.
Not only are jobs a vital part of our individual lives since they allow us to provide for ourselves and our families, overall employment is an integral part of the economy. Other core drivers of economic growth, namely consumer spending, are also directly affected by employment. This is why the central bank of the United States, the Federal Reserve, operates under a “Dual Mandate” – the goal of fostering economic conditions that achieve stable prices and maximum sustainable employment. Because of the importance of the national employment situation, there is a great deal of attention paid to the monthly Payroll and Unemployment Reports released by the Bureau of Labor Statistics (BLS) on the first Friday of each month. However, as a result of the high levels of inflation currently being experienced here in the U.S. (as well as around the globe), the Fed has stated they are going to focus on fighting inflation even if it comes at the expense of hurting the labor market; in essence putting more emphasis on price stability than labor conditions. They have openly expressed their plans to continue to raise interest rates for the foreseeable future and expect this to negatively impact employment since tighter monetary conditions, in the form of higher interest rates and less money supply, tend to slow economic growth.
The monthly employment reports released last week were in many ways the best of both worlds. Many referred to it as a “Goldilocks” report – not too hot and not too cold. If the reports had been too strong, it would imply that the labor market remains tight, putting pressure on wages and contributing to inflation. If the reports were too weak, there would have been concern the economy was slowing faster than anticipated. By coming in right at expectations, it shows employment continues to grow at a measured pace. Further, the underlying components of the labor report did not indicate that employment is contributing to inflation. This report gave credence to the thought the Fed will be able to engineer a “soft landing” and somehow avoid a recession. However, since the Fed is committed to aggressively fighting inflation using the tools at their disposal, we still believe a recession will be nearly impossible to avoid and we are likely to see one in the latter part of next year or sometime in 2024.
Punching the Clock (and Keeping Track of Time)
The major stock market indices were lower in August, peaking around the middle of the month and then giving back those gains. The S&P 500 continued to rally during the first couple weeks of the month, rising some 17% off the lows set in June, only to retreat and end the month lower by 4%. Bond yields moved higher, with the yield on the 2-year Treasury reaching its highest level since 2007. Most commodities, including oil and precious metals, were lower for the month due to fears over weakening demand resulting from an economic slowdown. The major theme in the markets for the month was shifting expectations from the Federal Reserve. At the end of July the prevailing thought was that the Fed would continue to raise rates through the end of this year and then pivot and lower rates in mid-2023 as the economy slows or possibly even retracts. These expectations were quickly tempered by comments from Fed officials who maintained much work remains to be done on inflation before any loosening on policy can be contemplated.
For the year the S&P 500 is lower by more than 17% with the tech-heavy Nasdaq off by 25%. This is the fourth worst start to a year in history for the S&P 500, as well as one of the most volatile. But the biggest market story may be the bond market which has suffered losses nearly as bad as the equity markets. No fixed income sectors have escaped the carnage as we’ve seen interest rates rise at one of the fastest paces in history. With bond yields falling for 40 years and finally reaching near zero during the pandemic, there really was not anywhere to go but up. And now dealing with the highest levels of inflation experienced in 40 years, bond yields have moved up quickly, pushing bond prices lower. This has been a harsh reminder there is risk in the bond market and while historically not as volatile as stocks, the risk of sizeable loss remains.
The market volatility experienced this year will likely continue into September. Historically speaking, September is not one of the better ones for the market but trying to time the market based on the calendar would be foolish. Inflation and the Fed will be the major themes of the month and there will be increasing attention given to the upcoming elections in November including the impact those could have on the markets and economy going into 2023. The Federal Reserve is slated to double the pace of their bond runoff program, known as quantitative tightening (“QT”) this month which will further reduce the money supply and should, in theory, work towards reducing inflation. But looking back on past experience, reducing liquidity in the markets does not bode well for stocks. We anticipate continued difficulty in the bond market in the face of rising interest rates.
Here at Secured Retirement, we focus our efforts on helping people realize their financial goals as they transition from the workforce. We also want to recognize that the work of Americans, such as yourselves, over the past several decades has contributed to the strongest economic growth in history. The benefactors of our robust American economy and way of life, which is each and every one of us, thank you for your work.
Labor Day is generally considered to be the unofficial end of summer, but this is not necessarily bad news since autumn is arguably the most favored season here in Minnesota. This holiday is observed for all working people, past and present, so be sure to take time to enjoy it.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # 952-460-3260