Dear Clients & Friends,
It’s time for our monthly update on prevailing economic and investment market related risks. In most months we focus mainly on market related risks as that seems to be more interesting to most of our clients and gives a more direct line of sight to their investment portfolio. However, this month, we are going to discuss metrics related to the economy instead of the market, and here’s why.
The unique forecast we made in early summer included continued, albeit modest, growth in our portfolios prior to a negative inflection in the markets. At the time, we had argued that the market could add another 5%-10% growth prior to a recession. This means that it may be easy to mistake current momentum for expected future momentum.
In this weekend’s reading, we hope to show you why we think the market still has room for growth prior to our predicted recession in late 2018 or early 2019. Herein lies the reasoning behind “slowly” moving towards a defensive stance in our portfolios. As usual, we turn to our good friend Brad McMillan of the Independent Investor.
July’s data was largely positive, with improvements in employment and consumer confidence leading the way. With unemployment at a 16-year low and no signs of slowing, the strength of the labor market is continuing to power the current recovery. While business confidence showed some signs of softening, overall conditions remain healthy.
The Service Sector
Signal: Green light
The ISM Nonmanufacturing Index disappointed in July, coming in well below both June levels and expectations. This is not a positive development, but it could be just noise. The index remains at an expansionary level, and we have seen similar one-month declines in the past. But that being said—and given the strength of recent data—this is worth watching but is not an immediate concern. This indicator, therefore, remains a green light.
Private Employment: Annual Change
Signal: Green light
July job creation beat expectations: 209,000 jobs were added against expectations of 180,000. In addition, June’s already strong results were revised upward to 231,000 new jobs. The unemployment rate ticked down slightly during the month, which was positive given an increase in the labor force participation rate.
Because this is an annual figure, the changes are slower and smaller than are those we see in more frequently reported data. Given the volatility of employment growth, this indicator remains a green light, although the current downward trend bears monitoring.
Private Employment: Monthly Change
Signal: Green light
These are the same numbers as in the previous chart but on a month-to-month basis, which can provide a better short-term signal.
Over the past two months, 440,000 new jobs have been created. This is a very solid result given the low unemployment rate and the overall healthy nature of the employment situation in the U.S. The underlying data was also positive, as average hourly earnings increased by 2.5 percent year over year. With two strong months, this indicator remains healthy—and at a green light.
Yield Curve (10-Year Minus 3-Month Treasury Rates)
Signal: Green light
The spread between the 10-year and 3-month rates has dropped to the lowest level since the financial crisis, but it appears to be stabilizing. As such, and since it remains well above the trouble zone, we are leaving this indicator at a green light but will continue to monitor it.
Consumer Confidence: Annual Change
Signal: Green light
Consumer confidence increased slightly in July following decreases in the previous three months. This measure now sits at its second-highest level in 16 years and shows no signs of slowing. This high level of consumer confidence bodes well for second-half growth and leaves this measure as a green light.
Conclusion: Healthy economy, positive trends improve
The improvements in confidence and job growth are significant positive factors here and largely offset the weakness seen in business confidence. In addition, the possible stabilization in the yield curve reduces immediate risk. Overall, conditions remain favorable, and economic risks are well contained. The economy gets a green light for August.
As you can see, we remain confident in the short-term economy as it continues to show robust signs of growth. However, when you zoom out, as we did several weeks ago, it becomes clear that we are nearing a probable end to the current growth cycle. We also note a great deal of fear regarding political posturing, both at home and abroad. In addition, we see the dollar nearly collapsing due to continued deterioration in confidence with our current governmental leadership. Therefore, while we remain poised for a market inflection within the next 18-24 months, we do see the clear possibility of further profit beforehand. In consideration thereof, and while we have already reduced risk three times this year, we remain fully invested and hopeful for a profitable autumn. We see green lights here, but we remain diligent for the yellow light that we expect, because we all know what color appears afterwards.
Have a lovely weekend and don’t look directly at the sun on Monday!!!
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 |
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The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. As stated above, commentary for the 5 risk factors provided by Brad McMillan and published in the Independent Market Observer. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. The S and P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.