Market Snapshot – May 2023

May 11, 2023

Published by Charles Schwab

Given the attention lately on the health of the labor market, that’s the topic for this month’s video, especially in the wake ofwhat was at least on the surface, a better than expected jobs report for April.

Now, let’s start with an important discussion around buckets. Buckets? ‘What is she talking about?’, you probably ask. Well, pretty much every economic data point can be sorted into one of three broad buckets: leading indicators, coincident indicators, and lagging indicators. In addition, there are subsets of leading indicators. In other words, certain data points that lead the common leading indicators. And we’ll get to that in more detail shortly.

Leading Indicators

Initial unemployment claims represents one of those heads up indicators that moves in advance of broader economic trends. This table shows every official recession start point by month back to the late 1960s.In addition, the dates and levels of troughs in the four week average of unemployment claims, as well as the percentage increase in claims leading into each recession start point. This is actually a perfect example of my – probably my favorite adage, which is better or worse, tends to matter more than good or bad when it comes to economic data. Yes, the latest reading of 239,000 for the four week average of unemployment claims is still low in level terms; no question about that. But it’s up more than 25%from the trough, which was last September. And as you can see, the average increase in claims heading into recessions has historically only been 20%. Again, it’s the rate of change that matters at least as much as the level.

Coincident Indicators

Nonfarm payrolls is one such indicator. Now, as you can see, payrolls are actually often still trending higher at the onset of recessions, in part because the NBER, they’re the official arbiters of recessions, they backdate recessions’ starts to at or near whatever the recent peak was in the aggregate data they track, including payrolls. So keep that in mind.

Lagging Indicators

Here’s a long term look at the unemployment rate. I can’t tell you, especially these days, how often I hear something to the tune of there’s no way the economy is at risk of a recession with such a low unemployment rate. Well, as a lagging indicator. The unemployment rate doesn’t foretell recessions. In fact, as you can see, it’s historically been very near its low at the outset of recessions. Maybe put another way, a rising unemployment rate doesn’t bring on recessions. Recessions ultimately bring on a rising unemployment rate. Now, an understanding of the relationship between payrolls and the unemployment rate is also important. The monthly nonfarm payrolls release comes from the Bureau of Labor Statistics establishment survey. That’s what it’s called, which counts jobs. On the other hand, the unemployment rate is calculated from a separate survey called the Household Survey, which counts people. Now, over the past 12 months, the establishment survey suggests that 4.25 million jobs were added, while it’s only 2.7 million jobs per the household survey. Now, some of the differences. The establishment survey includes qualitative assumptions and adjustments tied to seasonality for one, as well as what the Bureau of Labor Statistics calls the birth death model. It’s not of people. It estimates the birth and death of businesses. For what it’s worth, the birth/death assumptions in particular tend to overstate business births and understate business deaths at important inflection points down in the economy. In addition, again, for what it’s worth, the household survey does tend to be more accurate around those same inflection down points with the establishment survey data ultimately subject to pretty significant revisions to prior releases. In fact, related to that, the April jobs report showed payroll growth that was stronger than expected. However, there were significant revisions to the prior two months data. In fact, the downward revision to March’s data was about the same amount by which the April data beat expectations. Keep that in mind.

Now, in another sign of at least a loosening up of what has been a very tight labor market, the prime age labor force participation rate continues to move higher and actually finally surpassed the pre-pandemic peak. Now, this at least, is in keeping with what the Federal Reserve is looking for to help bring inflation down.

Now, another component of the labor market tied to the ongoing inflation problem is wage growth not yet approaching what might be considered the Fed’s comfort zone. As of April, average hourly earnings were slightly higher than the prior month. Keep in mind, though, that this is an average and is likely skewed lower by something called the mix shift. I’ll explain that in a moment. Because of this, we also need to look at median measures of wage growth, not just average measures. And we can look at a median courtesy of the Atlanta Fed Wage Growth tracker as it’s called. Now you see a meaningful divergence between these two measures recently, and that’s because layoffs to date have been disproportionately biased toward higher wage jobs within higher wage industries. So get back to the average thing and the mix shift. What happens when you take a bunch of high numbers out of an average? The average goes down. A median measure is not biased as such. Hence the spread between the two. And we can look at this in a little more detail here. This plots average hourly earnings against payroll growth for each defined sector. And the mixed shift effect is in play. If you look at the information and education slash health services sectors as two examples. Information, as you can see, is the highest paying sector, but job creation was the weakest in April. Conversely, the education/health services sector is in the middle of the pack in terms of hourly earnings, but had the strongest job growth last month.

Finally, we can move on to the recent release of data from the JOLTS report, that stands for the Job Opening and Labor Turnover Survey. Job openings fell from nearly 10 million in February to less than 9.6 million in March. By the way, the data lags other labor market data by a month. That’s why we’re talking about March data and not April. Put another way, the job openings rate fell to 5.8%,keeping its swift move off the peak in places you can see. Now, the rolling over in job openings has been a key supporting factor for those hoping for a soft landing. But that wasn’t the case in March. Given that the layoffs and discharge rate rose sharply. If we continue to see this, it would confirm that the reduction in job openings is consistent with a recession or hard landing, not a soft landing.

In summary, unemployment claims lead with job openings and layoffs leading those. Payrolls are a coincident indicator, also subject to revisions and adjustment vagaries. And the unemployment rate lags. In keeping with what the Fed wants to see, the labor force participation rate is moving higher, but wage growth may still be a little too hot. Unique in this cycle is the “top down”, as I’ve been calling it, or higher wage nature of layoffs to date. But of course, so many things are unique in this pandemic-afflicted cycle. My final thought is to remind viewers that it’s often the case that better or worse matters more than good. Keep that in mind as you look at economic data to judge just where we are in this unique cycle.

Weekly Market Outlook

May 8, 2023

Will Charles III’s first act as King be to raise inflation? Will CPI show the Fed’s fight against inflation is far from over? And will there be any signs of a breakthrough on the debt ceiling? I’m Jeff Kleintop with 90 seconds on all this and much more of what you need to know for the week ahead.

The weekend’s coronation of King Charles III is expected to have cost £100million, but deliver £350 million in extra sales for UK pubs and restaurants. That’s a nice multiplier effect, but it comes when services and food inflation are already high and could add to further inflation pressures.

On Tuesday, President Biden is scheduled to meet with congressional leaders on the debt ceiling. Treasury Secretary Yellen has said the default could come as soon as June 1st. Also, Tuesday is Victory Day in Russia, commemorating World War II, as a spring offensive by Ukrainian forces appears to be getting under way. A day later, NATO defense chiefs meet in Brussels.

Finally on Tuesday, China’s inflation data is likely to keep the window open for the People’s Bank of China to add stimulus with a rate cut in coming months. CPI likely rose just 0.3% from a year ago. On Wednesday, falling hard on the heels of the Fed’s meeting last week where they signaled an end to the series of rate hikes, the April CPI release may highlight that the fight against inflation is far from over. In year-over-year terms, CPI inflation is expected to remain at 5%, with core inflation stubbornly elevated at 5.4.

On Thursday, the Bank of England is set to lift interest rates by 25 basis points to 4.5%. The Central Bank is likely to cite recent surprises in CPI and wage data as justification.

How Inflation Impacts Wealth Management and Investment Strategies

March 29, 2023

Navigating High Inflationary Periods and Protecting Your Wealth Over Time

Inflation is an economic concept that describes the increase in the cost of goods and services over time. As inflation rises, the purchasing power of your money decreases – which you may feel in your daily life. However, it can also have a significant impact on your long-term wealth management and investment strategies. In this article, we’ll explore how inflation impacts wealth management and investment strategies and provide tips on how to navigate inflationary periods.

Erosion of the Value of Money

Inflation can have a significant impact on the value of your money. As prices rise, the purchasing power of your money decreases, which means you can buy fewer goods and services with the same amount of money. This erosion of value can have a significant impact on your wealth management and investment strategies, regardless of your stage in life. If you’re still working and building a nest egg, it may mean you’re able to save or invest less than you can in periods of lower inflation. If you’re already retired, it may mean you need to adjust your withdrawal strategy to pay the bills, which means your nest egg may not last as long as you had planned.

Investment Returns May Not Keep Pace

Inflation can also have an impact on investment returns and require you to take a closer look at your portfolio. While investments can generate returns over time, those returns may not keep pace with inflation. For example, if inflation is 3% per year, and your investment returns are only 2%, your purchasing power will still decrease over time. If you find yourself in this situation, you’ll want to consider seeking out investments that provide returns that are higher than the rate of inflation in order to better protect your wealth.

Diversification Becomes Even More Critical

Diversification is always a smart option, but it becomes a key strategy for wealth management and investment in inflationary periods. By diversifying your investments across different asset classes, you can spread your risk and reduce the impact of inflation on your overall portfolio. For example, investing in stocks, bonds, and real estate can provide a more balanced portfolio that is less vulnerable than a portfolio that is more heavily weighted toward inflationary shocks.

You Might Consider Inflation-Protected Securities

Inflation-protected securities (IPS) are investments that are specifically designed to protect against inflation. These securities are typically linked to the Consumer Price Index (CPI), which measures inflation, and they provide returns that are adjusted for inflation. IPS can provide a hedge against inflationary periods and can be a valuable tool for wealth management in times of high inflation.

Mitigate Impact with Tax-Efficient Investment Strategies

If you’re not already practicing tax-efficient investment strategies, you’ll want to begin for a number of reasons – not the least of which is that doing so can help mitigate the impact of inflation on your wealth. By investing in tax-efficient vehicles, such as 401(k) plans, IRAs, and municipal bonds, you can reduce the amount of taxes you pay on your investment returns, which can help boost your overall returns and protect your wealth against inflation over the long term.

Would You Like to Learn More About How Inflation Impacts Wealth Management and Investing?

Inflation can have a significant impact on wealth management and investment strategies, and on your day-to-day life, too. By understanding how inflation erodes the value of money, considering diversification and investing in inflation-protected securities, and taking advantage of tax-efficient investment strategies, you can take steps that may help protect your wealth and stay ahead of inflationary periods. With careful planning and a diversified portfolio, you can better navigate inflationary periods and continue building wealth over time.

If you’d like to discuss more about how inflation impacts wealth management, contact Lane Hipple Wealth Management Group at our Moorestown, NJ office by calling 856-638-1855, emailing info@lanehipple.com, or to schedule a complimentary discovery call, use this link to find a convenient time.

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Markets Mixed as Growth and Tech Names Jump on Hopes That the Fed Might Have Reached an Inflection Point on Hiking Rates

March 17, 2023

• This week was dominated by banking worries that started with the collapse of Silicon Valley Bank last week and spread to Signature Bank of New York and a few others this week
  
  
• But before markets opened on Monday, Wall Street learned through a joint statement from the Federal Reserve, Treasury, and the FDIC that all depositors at SVB and Signature Bank would be able to access deposits on Monday, despite being taken over by regulators
  
  
• When Friday’s final Wall Street bell rung, equity returns were mixed, as the small-cap Russell 2000 lost 2.6%, pushing it into the red for the year (YTD: -2.0%) and the mega-cap DJIA lost 0.1%, pushing it further into the red for the year (YTD: -3.9%)
  
  
• The tech-heavy NASDAQ, on the other hand, leapt an astonishing 4.4%, as investors hoped that the Fed’s rate hiking might slow down or be over for the year
  
  
• The large-cap S&P 500 inched up 1.4% and is positive for the year (YTD: +2.0%)
  
  
• Of the 11 S&P 500 sectors, 6 were positive, with the growth sectors, especially Communication Services (+6.9%) and Information Technology (+5.7%), outpacing the defensive sectors like Utilities (+3.9%) and Consumer staples (+1.3%)
  
  
• The 2-year Treasury yield sank 77 basis points to 3.82% and the 10-year Treasury note yield fell 29 basis points to 3.40%
  
  
• Oil prices dropped 13.5% this week to $66.33/barrel, the lowest level since December 2021
  

Weekly Market Update – March 17, 2023

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD.
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results

Markets Mixed as Bank-Failure-Worries Ease

It was another volatile week for equity markets around the world, as pressures mounted on the banking sector as concerns grew after the failures of Silicon Valley Bank and Signature Bank and worries at First Republic Bank and Credit Suisse.

And while pundits were quick to call attention to the big bank failures of 2008/2009, this week was different as governments (including the Fed, the Federal Deposit Insurance Corporation, and the Treasury Department) and other well-capitalized banks stepped in quickly to put worries at ease.

Then as bond yields dropped swiftly, equities rebounded, giving investors a good case of whiplash. When the week ended, the major U.S. equity indices finished mixed, as the current banking worries might ultimately end up as an inflection point where the Fed slows down or even pauses future rate hikes this year.

Not surprisingly, the 11 S&P 500 sectors varied markedly, with 5 of the 11 ending the week in the red. Specifically, Communication Services (+6.9%) and Information Technology (+5.7%) made big weekly jumps and Financials (-4.9%) and Energy (-6.9%) struggled with big losses. The range in sector returns was further underscored as Large Growth outperformed Large Value by almost 6%.

While the bank failures were unpleasant, glass-half-full investors were hopeful that the Fed might adjust its monetary policy and not raise rates by as much. By the end of the week, the fed fund futures markets were pricing in zero likelihood of a 50-basis-point hike versus a 40% chance just one week ago and an almost 40% chance of no rate hike at the Fed’s upcoming meeting on March 21^st.

While it seemed everyone was focused on the latest banking news, there was a lot of economic data this week too, including:

• The Consumer Price Index was was up 0.4% month-over-month in February, and up 6.0% year-over-year, which was the smallest 12-month increase since September 2021
  
  
• Core CPI, which excludes food and energy, was up 0.5% month-over-month and up 5.5% year-over-year, which was the smallest 12-month increase since December 2021
  
  
• The February NFIB Small Business Optimism Index came in at 90.9
  
  
• Weekly MBA Mortgage Applications Index were up 6.5%
  
  
• February Retail Sales were down 0.4%
  
  
• February Retail Sales ex-autos were down 0.1%
  
  
• February PPI was down 0.1%
  
  
• February Core PPI was flat at 0.0%
  
  
• January Business Inventories were down 0.1%
  
  
• Weekly Initial Claims came in at 192,000
  
  
• February Import Prices were down 0.1%
  
  
• February Export Prices were up 0.2%
  
  
• Leading Indicators fell 0.3% in February
  
  
• The preliminary University of Michigan Consumer Sentiment Index for March dropped to 63.4
  

Consumer Price Index Records Smaller Increase, But Food Index is Up 9.5% Over the Last Year

On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers rose 0.4% in February, after increasing 0.5% in January. Over the last 12 months, the all items index increased 6.0% before seasonal adjustment.

Specifically:

• The index for shelter was the largest contributor to the monthly all items increase, accounting for over 70% of the increase, with the indexes for food, recreation, and household furnishings and operations also contributing.
  
  
• The food index increased 0.4% over the month with the food at home index rising 0.3%.
  
  
• The energy index decreased 0.6% over the month as the natural gas and fuel oil indexes both declined.
  
  

• Categories which increased in February include shelter, recreation, household furnishings and operations, and airline
  fares.
  
  
• The index for used cars and trucks and the index for medical care were among those that decreased over the month.
  

Inflation Over the Past 12-Month

The all items index increased 6.0% for the 12 months ending February; this was the smallest 12-month increase since the period ending September 2021.

• The all items less food and energy index rose 5.5% over the last 12 months, its smallest 12-month increase since December 2021.
  
  
• The energy index increased 5.2% for the 12 months ending February.
  
  
• The food index increased 9.5% over the last year.
  

Food Index

• The food index increased 0.4% in February, and the food at home index rose 0.3% over the month. Five of the six major grocery store food group indexes increased over the month. The index for nonalcoholic beverages increased 1.0% in February, after a 0.4% increase the previous month. The indexes for other food at home and for cereals and bakery products each rose 0.3% over the month. The index for fruits and vegetables increased 0.2% in February, and the index for dairy and related products rose 0.1%.
  
  
• In contrast, the meats, poultry, fish, and eggs index fell 0.1 percent over the month, the first decrease in that index since December 2021. The index for eggs fell 6.7% in February following sharp increases in recent months.
  

Nearly Half of Small Businesses Have Job Openings They Can’t Fill

Early in the week, the National Federation of Independent Businesses reported that 47% of small business owners reported job openings they could not fill in the current period.

Specifically, “[t]he percent of small business owners reporting labor quality as their top small business operating problem remains elevated at 21%, down three points from January. Labor cost reported as the single most important problem to business owners increased two points to 12%, down one point below the highest reading of 13% reached in December 2021.

A seasonally adjusted net 17% of owners are planning to create new jobs in the next three months, down two points from January and 15 points below its record high reading of 32 reached in August 2021, showing that the trend in planned hiring is on the decline.

Sixty percent of owners reported hiring or trying to hire in January, up three points from January. Of those hiring or trying to hire, 90% of owners reported few or no qualified applicants for the positions they were trying to fill. Thirty percent of owners reported few qualified applicants for their open positions.

Further:

• 46% of owners reported raising compensation, unchanged from last month.
  
  
• 23% plan to raise compensation in the next three months, up one point from January.
  
  
• 38% of owners have job openings for skilled workers.
  
  
• 19% have openings for unskilled labor.
  

Sources:  bls.gov;  nfib.com;  msci.com; fidelity.com; nasdaq.com;  wsj.com;  morningstar.com

Inflation Was Up 0.5% in January and 6.4% Over the Past 12-Months

February 15, 2023

On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.5% in January on a seasonally adjusted basis, after increasing 0.1% in December. Over the last 12 months, the all items index increased 6.4% before seasonal adjustment.

Specifically:

• The index for shelter was by far the largest contributor to the monthly all items increase, accounting for nearly half of the monthly all items increase, with the indexes for food, gasoline, and natural gas also contributing.
• The food index increased 0.5% over the month with the food at home index rising 0.4%.
• The energy index increased 2.0% over the month as all major energy component indexes rose over the month.

The index for all items less food and energy rose 0.4% in January. Categories which increased in January include the shelter, motor vehicle insurance, recreation, apparel, and household furnishings and operations indexes. The indexes for used cars and trucks, medical care, and airline fares were among those that decreased over the month.

The all items index increased 6.4% for the 12 months ending January; this was the smallest 12-month increase since the period ending October 2021. The all items less food and energy index rose 5.6% over the last 12 months, its smallest 12-month increase since December 2021. The energy index increased 8.7% for the 12 months ending January, and the food index increased 10.1%.

Inflation Over the Past 20-Years

Sources: bls.gov