Waiting on the Fed
Equity markets made up some ground last week, with trading made a day shorter by the Labor Day holiday. Volatility remained elevated as investors continued to look ahead to this Thursday’s announcement of the Fed’s interest rate decision, which could be the first rate hike in nearly ten years. As we have written on several occasions recently, the fundamentals of the U.S. economy are positive on balance and could certainly lend support to a rate hike decision. There is widespread debate as to whether equity markets are ready emotionally to calmly handle such a decision. Recent trading (August 24th, anyone?) would indicate the answer to that question is no. Our counter to that argument would be that the Fed should not be involved in manipulating markets, up or down, in the first place. We will save further thoughts on that subject for another time and place.
Consider the predicament facing the Fed. Last week, consumer confidence posted its biggest decline since December 2012 amid increased market volatility and negative headlines out of developing economies, including (of course) China. Additionally, wholesale prices were flat in August, led by a 3.3% decline in energy prices and a strong dollar. Score one for the “doves” arguing to hold rates steady.
Not so fast, say the “hawks” clamoring for the Fed to act. Last week also brought news that fewer Americans filed for jobless benefits, as claims fell by 6,000 to 275,000 for the week, indicating a strengthening job market. And fourth-quarter hiring plans stayed strong in the small business sector, and hit their highest level since 2007 for large companies, according to the Manpower Employment Outlook Survey.
Overall, nominal GDP growth (which includes inflation) has grown at about a 4% annual rate in the past two years. The unemployment rate is about 5.1%, one percentage below a year ago, although many remain underemployed and the labor participation rate has fallen. On balance, however, job market trends are moving in the right direction. Because the economy lags changes in monetary policy and interest rates, further movement in the right direction is essentially a given going forward barring a cataclysmic external shock to the global economy. Such looming dread leads back to China, the August panic, and the elevated volatility referenced earlier.
Our portfolio positioning remains the same as spelled out in last week’s update. For those who cannot bring themselves to parse “Fedspeak,” we will watch Thursday’s news conference so you don’t have to. More to come as warranted…