A Positive Turn or Trouble in Disguise
Dear Clients and Friends,
I am pleased, though hesitant, to report that the economy has gotten a little bit better. It’s a convoluted thing to say: the economy is neither good nor bad, and its growth rate is slowing down, but the economy is indeed still growing, but growing less now than before... Let’s go a little deeper, because this improvement could be impending danger in disguise.
Currently, the unemployment rate is incredibly low. In fact, June 2019 showed the lowest monthly unemployment rate in 49 years. In addition, the December 2019 underemployment rate was the lowest since the US started tracking it in 1994.
This low unemployment rate is contributing to a high level of consumer confidence, and this sense of confidence seems to be driving consumption. Consumption is driving the stock market, gains in the stock market further increase consumer confidence, confidence further increases consumption, which increases the stock market even more, and the circle goes around and around.
However, what happens when the law of supply and demand kicks in? When there are low amounts of any resource, the relative cost of that resource increases - including human resources. What if profit margins decreased due to the higher cost of labor that comes with a low unemployment rate? As the cost of labor increases, profits and earnings decrease and people get laid off. Therefore, consumption decreases and the economy slows down. Consumer confidence and the stock markets fall, which would cause a further decrease in consumption - the circle starts to move in reverse. Obviously, I am focusing on three out of a zillion metrics, but it’s a good example of how good news can be bad news in disguise.
This is also why our economy moves in waves. When it gets too good, something has to give- in my example, it’s the unsustainably low unemployment rate. During a recession, there is a large supply of human resources because many people are out of work. Thus, the cost of human resources goes down, which increases profit margins - and the wave starts to rise again.
So, where does that leave us?
January was a rough month: the US attack on Iran, the coronavirus outbreak, Donald Trump’s impeachment fiasco, Brexit, lions, tigers, and bears, oh my! So, what did the market do? It hit an all-time high!!! Yes, it was down at the end of the month -but it hit another high in early February.
It makes some sense that the markets moved up when they did. Global uncertainties had receded somewhat: the first phase of the China deal was completed, the impeachment trial ended, Brexit came and went, etc. In addition, housing has continued to expand, interest rates remain low and consumers are happy.
On the other hand, we are in an election year. It is our opinion that the President will do whatever it takes to keep the stock market on its upward trajectory. This is contrary to our forecast of a recession setting in for 2020, but we remain extremely cautious for 3 general reasons:
The economy may be able to stay strong for longer than we had expected, but it can’t continue to get better. Unemployment will not reach zero…ever.
Our debt is unsustainable. The massive tax cuts from two years ago have not come anywhere close to paying for themselves, but rather have ballooned our national deficit to an all-time high.
The discretionary savings rate of our younger generation is twice that of the boomers when boomers were their age. This means that an inevitable drop in consumption will continue for the foreseeable future. In addition, because of the unbearable rise in education and healthcare costs, millennials possess 85% less wealth (as a percentage of total US wealth) than the boomers did at their age. Which explains why the savings rate of millennials is twice that of the boomers when boomers were their age.
So, we’ve got some issues. How does this affect your portfolio?
I am pleased that the vast majority of clients outperformed their risk-based benchmarks in 2019 despite maintaining an investment allocation that is less aggressive than they usually carry. One would think that less risk equals less reward. However, a few good decisions made last year allowed a less risky allocation to achieve returns that were higher than anticipated. That being said, we still maintain less risk for clients than we usually hold due to the frothy nature of the investment markets and the uncertainty that comes with this being an election year.
Thus, we are very happy with our current allocation. We hope to absorb more investment returns in 2020, but we shall not fear a recession. It is the most profitable part of the economic cycle for a wise investor.
That’s where we are right now. Next week, we will share our more technical Market Risk Update.
Have a lovely weekend.
-MORWM math nerds.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
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