Labor Day marks the end of summer and is dedicated to honoring the American labor movement. The first Labor Day celebration occurred on September 5, 1882, in New York City and was organized by the Central Labor Union.
Labor (To)day
What to Expect When You're Expecting (a Rate Cut)
“What to Expect When You’re Expecting” is a book for many first-time parents. My wife and I are preparing for our third child’s arrival in October, a process that has been a mix of excitement and logistical planning. While this is not our first rodeo, the passage of time has certainly brought a fresh set of challenges.
The Devil (and Dove) Are in the Details
Last week, over 28 million unique viewers tuned into the Games of the XXXIII Olympiad opening ceremony in Paris, France, double the combined state populations of Oregon, Washington and Idaho. The ceremony set the stage for the coming weeks of competition and allowed viewers to catch their first glimpses of the best athletes in the world. This week, investors were focused on a different stage: the Federal Open Market Committee (FOMC) press conference, which offered insight into the Fed’s future perspectives on inflation and employment.
Opportunity Costs
This week, a slew of economic reports, which included inflation data, employment figures and retail sales reports, continue to indicate that the Fed still has a way to go on its quest to tame inflation.
Paranoid
This year, investors have wrestled with several paradoxical headlines: rising inflation, a tighter Fed, possible recession, a strong labor market and a healthy consumer. Unfortunately, the paranoia caused by these reports continues as markets wrapped up the first six months of 2022 with the S&P 500 down 20%, resulting in the worst start of the year since 1970.
Fed Meets, Big Stocks Beats
“The path of the economy will depend significantly on the course of the virus.” Chairman Jerome Powell reiterated this point emphatically in his comments following the two-day meeting of the Federal Open Market Committee (FOMC). To most people this may seem like stating the obvious, but sometimes it bears repeating, especially considering the data released this week.
A Lost Decade
This morning, the U.S. Bureau of Labor Statistics released unemployment statistics capturing the full effects of shelter-in-place mandates: in April, over 20 million jobs were lost, the highest monthly loss on record. This resulted in an unemployment rate of 14.7 percent, the highest since the Great Depression when unemployment was above 25 percent.
Unprecedented ... By All Measures
By all measures, this new reality is unprecedented. To start, this is not a typical recession whereby the economy runs “too hot,” such as when a major industry collapses like the banking system during the mortgage crisis or the technology sector of the early 2000s.
Sustaining Growth
Investors anticipating Fed rate cuts in the months ahead have become inversely sensitized to economic news supporting continued economic expansion. Last week’s surprisingly tepid payroll report and today’s reassuring read on U.S. retail sales resulted in opposing stock price reactions.
No Brackets Busted by the Fed
As traders were nursing their wounds from early bracket pains, the market saw that U.S. stocks were muted this week, up 0.2 percent. Investors’ reactions to finally getting the anticipated Fed rate hike were tempered by oil production figures from OPEC, causing concern early in the week.
Let the Games Begin
With the opening ceremonies of the Rio Olympics set to begin tonight and on the heels of a strong number in the month of July in which the U.S. added 255K jobs, stocks ended the week with a bang. This was meaningfully ahead of
When Yellen Speaks, the World Listen
Stocks finished the week off by only 0.80 percent, recovering some of the losses suffered Thursday after the Fed voted to keep interest rates unchanged. Similarly, the Bank of Japan and Bank of England are also maintaining their monetary
Here Comes Santa Claus
by Ralph Cole, CFA
Executive Vice President of Research
The Federal Reserve delivered some early Christmas cheer with a new policy statement on Wednesday, and by Thursday afternoon the Dow average had advanced 700 points. Please excuse us for being frustrated by the constant attention to the Fed and the parsing of every statement they utter. This tends to happen during any Fed tightening cycle. The chart below shows the average S&P 500 performance around the last five Fed tightening cycles. As you can see, about six months before the Fed starts raising rates the market goes through a correction of 5–7 percent and volatility rises.
The U.S. economy continues to hum along, and there is no lack of positive economic indicators. We believe that the Fed will be raising short-term interest rates in the middle of next year and they are doing their best to signal that move to the markets well in advance. The most recent examples last week were jobless claims, which dropped to a six-week low, consumer comfort climbing to a seven-year high, leading economic indicators rising an additional .6 percent and retail sales increasing by the most they have in eight months. In short, there is plenty of good economic news to go around, and enough momentum for the Fed to justify raising rates next year.
Wind of Change
While oil prices fell modestly this week, energy stocks began to rally. Since the peak in oil prices in June, the S&P energy sector fell 25 percent. This week oil prices are down another 2 percent, but oil stocks in the S&P were up 7 percent. We can’t say that we are surprised. Whenever you get such a dramatic drop in prices, it tends to produce bargains. Financial buyers aren’t necessarily brave enough to step into these situations, but strategic buyers are. This week Repsol, a Spanish oil company, made an offer to buy Talisman Energy for $12.9 billion. Talisman’s share price was as low as $3.96 on December 8, and now trades for just over $9.00 per share. We made the case last week that the sell-off in oil was overdone, and it appears others are coming to the same conclusion.
Our Takeaways from the Week
- The stock market will continue to experience increased volatility in the coming months as the Fed communicates its tightening plans
- The sell-off in oil stocks is overdone, and there is value in the sector
- Our warmest wishes for a happy holiday season!