The recent report indicating that nonfarm payrolls decreased by 263,000 last month is disheartening news. However, it may be beneficial to consider the situation with a broader perspective.
It is essential to acknowledge the continuous job losses the economy has faced each month since January 2008. The central question remains: is the increase in job losses last month compared to August indicative of a troubling trend, or is it merely statistical noise on the path to stabilization and, eventually, a labor market recovery?
While there is no clear answer, it is noteworthy that a similar setback in the recovery trend was observed during the June jobs update, which turned out to be a temporary dip followed by relative progress—less severe losses. Additionally, the June reversal didn’t deter investors, who continued to push asset prices upward in the months that followed. Unfortunately, we might not be as fortunate this time.
While it may seem repetitive, the positive news is welcomed: September saw widespread gains across major asset classes. Again.
Aside from minor fluctuations, global capital and commodity markets have been on a steady upward trajectory since March. This rebound is not entirely unexpected, given the significant losses experienced previously across different sectors. A swift recovery after extreme downturns is common, yet predicting its duration remains challenging.
In conclusion, while these prosperous times may not last indefinitely, they highlight the importance of diversification across asset classes, even if its benefits may not be immediately evident. However, as correlations among various stocks, bonds, REITs, and commodities become more pronounced in divergence, designing and managing investment portfolios will pose greater challenges moving forward.
For now, everyone benefits. Enjoy this phase while it lasts.
The focus is now on employment. More job growth would be ideal, although we might need to accept a slower pace of job losses for a while longer.
The official update for September nonfarm payrolls from the U.S. Labor Department will be released on Friday. Meanwhile, economists and analysts are busy estimating and analyzing the available data.
Wanted Technologies, an employment analytics firm, forecasts a reduction of 167,000 nonfarm payrolls in September. If accurate, this would signify an improvement compared to August’s loss of 216,000 jobs, albeit a modest one.
Investment advice varies widely, with some recommendations being beneficial, while others may be misleading or even harmful to investors’ long-term interests. This issue is perennial, presenting a considerable challenge for those seeking success in the financial landscape.
The primary difficulty for the average investor, and even some institutional ones, is that global capital markets are filled with complexity, short-term fluctuations, nuanced developments, and numerous pitfalls. Furthermore, much of what is often considered “investment intelligence” lacks true insight and understanding of portfolio design and risk management. A multitude of “experts” frequently dispense advice that encourages investors to make poorly-thought-out decisions by trying to time the market.
While some individuals can outperform the market, it is rare for everyday investors to consistently choose successful securities across varied asset classes. Our monthly publication, The Beta Investment Report, advocates a different approach. Instead of claiming to have a clear perspective on the future of risk and rewards across global capitals and commodities, we propose that a fully diversified portfolio of major asset classes, aligned with market values, serves as a strong foundation for analysis and adjustments tailored to our financial goals.
For a glimpse of the challenges that lie ahead, analyzing new orders for durable goods is a worthwhile exercise.
Durable goods are often seen as indicators of economic activity. Purchasing large items such as cars and airplanes requires a certain level of confidence in both the immediate economic outlook and personal (or corporate) finances. During economic downturns, procrastinating such purchases becomes tempting—after all, there’s always next month to buy a car.
The most recent update on new unemployment benefit claims brings a sense of cautious optimism, reflecting positive trends despite the absolute numbers. Initial claims for unemployment benefits dropped to 530,000 last week, marking the lowest level since mid-July, and significantly lower than the peak of 674,000 recorded during the week ending March 28, 2009.
This downward trend suggests that the recession’s most challenging period may be behind us, yet we are still waiting for additional corroborative data, such as continuing claims, which remain high. This indicates that while businesses are laying off fewer workers (as seen in initial claims), those already receiving unemployment benefits are struggling to find new jobs (as shown by continuing claims).
The relationship between the election cycle and the stock market is not new, yet the data continues to attract interest. CXO Advisory Group offers another perspective, though the results are mixed. Their research concludes,
“There appear to be both long-term and short-term connections between the U.S. national election cycle and stock market performance, with the third year of a presidential term generally being the most favorable and a brief rally observable during election periods. However, the confidence in these patterns is weak due to the small sample sizes for specific presidential terms.”
Additionally, a well-known study from a few years back indicated that “the excess returns in the stock market tend to be higher under Democratic administrations than under Republican ones.” Of course, this was back in 2003. Will this trend continue with the current administration? Current year-to-date returns might suggest a yes, but with the next election still over three years away, caution may still be prudent.
SEI made a similar observation last year, noting in a research note that “one year after an election, the average return of the DJIA was 2.18%. The Democrats had the advantage during this period, with an average return of 5.43%, and the best year attributed to Franklin D. Roosevelt with a staggering 29.96% in 1944. Conversely, the average return during the nine Republican administrations was -1.07%.”
However, some assert that predicting election outcomes is complicated enough without introducing stock market forecasts into the equation. For those who share this view, Professor Ray Fair of Yale is an authority on the nuances of forecasting elections and adept at understanding the limits of quantitative analysis in politics.
In our previous post, we mistakenly stated that inflation expectations were constant. We apologize for this error. What we intended to convey is that inflation expectations, along with the reported level of inflation, fluctuate continually, as any review of historical data can demonstrate. We have corrected this mistake. Thank you for your understanding.
The inflation forecast in the Treasury market has remained fairly stable since May, averaging between 1.5% and 2.0%. As of the most recent market close, the inflation outlook is 1.80%, calculated from the yield spread between the nominal 10-year Treasury bond and its inflation-indexed counterpart.
As illustrated in the accompanying chart, this stability comes after a period of extreme volatility that began last September with the collapse of Lehman Brothers, which triggered a significant market sell-off, excluding government bonds.
Currently, the Treasury market’s 1.8% inflation forecast stands in contrast to the headline consumer price index (CPI), which decreased by 1.5% over the past year through August. However, inflation in the core CPI—excluding the more volatile food and energy sectors—rose by 1.4% in the same period, just shy of the 1.8% projected inflation rate from the Treasury market.
The latest weekly update on unemployment claims reveals another downward trend, providing further evidence to suggest that the recession may be over. However, as reiterated, the end of the recession does not appear to signal a quick or strong recovery this time. This caution is bolstered by the recent rise in continuing jobless claims.
This comprehensive analysis provides a clear view of the employment landscape and its implications for the economy. The ongoing focus on labor statistics emphasizes the need for careful observation as we navigate through these challenging times. Observing trends and staying informed will be crucial for both investors and policymakers as they work towards a more stable economic future.
