On October 6th, the employment statistics from the Department of Labor were announced. The US economy shed 33,000 jobs in September; the first monthly net loss in six years. Considerably an anomaly in this current cycle and it was the good news bad news scenario. First the bad news — the jobs lost were attributed to the impact of Hurricanes Irma and Harvey. The good news – wages moved higher and unemployment fell to 4.2%.
Speaking of adding insult to injury in September, on October 8th, Hurricane Nate made landfall hitting the Gulf Coast and Biloxi Mississippi. With deadly hurricanes, a major earthquake in Mexico and the latest shootings in our beloved Las Vegas, our country is experiencing human loss and suffering testing our resolve and wrangling our nerves as we race toward the end of 2017. For most, the end of the year can’t arrive fast enough.
Our country may be torn, but we’re not out for the count by any stretch of the imagination. As one of the longest Bull market cycles, now concluding its ninth year, marches on, many on Wall Street and Main street are wondering what’s going to derail or propel the economic expansion. Given the environment of low unemployment, rising wages, stubbornly low inflation and rising export trade – accompanied by a weaker dollar, many questions persist. In fact, October 9th marks exactly ten years from the stock market peak before the Financial Panic of 2008. Q/3 earnings announcements begin the same week.
Based on total return, over the last ten years since September 2007, stocks have performed the best compared with the 10-year Treasury Note, gold, oil, housing, and cash. Assuming no major shift in October, the S&P 500 has generated a total return (capital gains plus reinvested dividends) of 7.4% per year, essentially doubling in value in ten years.1 Gold did well, but lagged stocks, increasing 5.7% per year. A 10-year Treasury Note purchased that night (now coming due), would have generated a yield of 4.7%. Oil was a laggard, down 4.3% per year. Home prices increased about 1% per year, on average, and “cash” averaged 0.4%, both trailing the 1.6% average gain in the consumer price index.2
And what about our Federal Reserve? The process of unwinding Quantitative Easing (QE) is going to take time. The Fed is going to trim the balance sheet by $10 billion a month for the first three months, $20 billion per month for the next three, and on and on until it hits a pace of $50 billion per month. When the FOMC initiates the “balance sheet normalization program” in October it would take until about 2021 for the balance sheet to reach what Economists believe is a normalized level.
I think the Fed could be more aggressive about reducing their balance sheet. Moreover, I don’t think QE helped the U.S. economy in the first place; all it did was stuff the banking system full of excess reserves that the banks didn’t lend aggressively due to stress testing requirements and because of government overreach with regulations. The Fed created the sugar high the financial press critiqued and investors craved so they could run the table with overweighting investment allocation in stocks.
Many now believe there will be a rate hike in December. In fact, in the last FOMC statement from September, their language stated, “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”3
The Fed isn’t the only central bank tilting toward a less-loose monetary policy. The Bank of England (BoE) and European Central Bank (ECB) also seem determined to start trimming back on some of the aggressive measures of the past decade. The BoE looks like it will soon move rates up after having cut them to 0.25% in the aftermath of the Brexit vote in June of 2016. Meanwhile, the ECB will start tapering its asset purchases.
Regardless of what happens soon, central banks around the world remain extremely accommodative. None of them are remotely close to running a “tight” monetary policy. Yes, I’ve discussed the Fed here before, but for investors, at this point it’s best to ignore the noise.
Jeff deGraaf, chairman of Renaissance Macro Research said that Employment data and purchasing managers index readings are at levels that both “generally imply overheating and a Fed aggressively pinching off the excesses with higher rates.” RenMac’s Master Employment Index is now in the 90th to 100th percentile, which is historically negative for S&P 500 forward returns, deGraaf said, as it signals the economy is running too hot.
“PMI readings are also in the top decile, which also points to a negative impact on S&P returns three and twelve months forward,” deGraaf said. He worries that the Fed’s preferred thermostat, inflation, remains in the bottom quartile. “That’s a little like judging the heat in a microwave by touching the door,” calling it the “wrong instrument for the wrong device.”4
Stocks are still undervalued relative to bonds, the Fed is still loose, and the economy is expanding. As long as there are “excess reserves” in the system, monetary policy will not threaten the recovery. If it takes the Fed as long as I think to fully tighten, this recovery may be the longest ever and last until 2019. Whether the Trump Administration can push through tax reform is a whole story onto itself given the divide among the GOP and the Democratic challenges to defend the middle and lower income classes.
You can’t ignore the loss of life due to senseless shootings, natural disasters, terrorism or isolated police brutality. But, you can ignore the noise created by headline risk in the markets from financial journalists who suggest that the markets have come too far and are overpriced. Regardless, it’s best to pay very close attention.
Mark Martiak is a New York based Investment Advisor Representative for Premier Wealth Advisors LLC. Mark is a regular Contributor for VEGAS LEGAL MAGAZINE who has appeared on CNBC’s CLOSING BELL, YAHOO! FINANCE MIDDAY MARKET MOVERS, FOX BUSINESS NETWORK and has been quoted in THE WALL STREET JOURNAL.
Securities offered through: First Allied Securities, Inc. A Registered Broker/Dealer. Member: FINRA /SIPC. Advisory Services offered through: Premier Wealth Advisors, LLC. (PWA) & First Allied Advisory Services, Inc. (FAAS). Both Registered Investment Advisers. PWA is not affiliated with First Allied Securities, Inc. or FAAS.
Such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist.
1 The article was written in October 2017. Some statistics may have changed before the publishing of this article.
2 Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. Indexes are unmanaged and investors are not able to invest directly into any index. Past performance is no guarantee of future results. The S&P 500 Dividends Reinvested Price Calculator with data taken from Robert Shiller: https://dqydj.com/sp-500-return-calculator/; http://www.econ.yale.edu/~shiller/data.htm.
3 Federal Reserve issues FOMC statement September 20, 2017
4 MarketWatch: Some Investors See Signs Stock Market ‘on verge’ of a melt-up: published: Oct 8th, 2017.
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