Highlights of this Week’s Update:
- Market volatility continued, but little net change overall for the major U.S. stock indices.
- Interest rates fall, with the average 30 year fixed rate mortgage at 4.07%.
- Employment numbers surprise to the upside, unemployment rate falls to 5.9%.
- Two key ingredients missing: Wage growth and the labor participation rate hits a 36 year low.
- Our outlook unchanged, remaining underweight stocks and diversified among fixed income/bonds and alternatives (gold, silver, commodities, and real estate).
- Call today to schedule your quarterly/year-end review.
We wanted to spend a brief moment discussing some of the recent volatility we’ve seen in stocks, particularly the Dow Jones Industrials. It’s the best known and oldest of the major market indexes, and its gets the most attention even though it covers only 30 stocks. Yes, they are 30 well-known firms, but still, it’s just 30 companies. We’ve witnessed 100+ point moves in seven of the last ten trading days. Four were negative and three were positive (St. Louis Federal Reserve data).
With the Dow residing near 17,000, a triple-digit move means much less than when the Dow was at a level of 5,000 or 6,000. For example, a 150-point change in the Dow at 17,000 amounts to 0.88%, versus 2.50% at 6,000. It is a good idea to keep that in perspective when you see the headlines.
Last week the volatility we saw had a relatively small negative net result on the major U.S. stock indices. The Dow dropped .60% and is now up 2.61% for 2014 through Friday. The broader S&P 500 gave up .75% for the week. Interest rates fell (bond prices rose), with the yield for the 10 year U.S. Treasury dropping to 2.45%. The average 30 year fixed rate mortgage ended the week at 4.07%, down from 4.12% the previous week. (Bankrate.com, U.S Treasury, MarketWatch)
Friday’s employment report strongly suggested the economy continues to firm, and the upward revisions to August helped alleviate worries that growth might be poised to slow. Nonfarm payrolls grew by 248,000 in September, while August’s lackluster reading was revised to 180,000 from the initial report of 142,000 (BLS). July was revised to 243,000 from 212,000. Including the upward revisions, September’s better-than-forecast increase of 248,000 beat the Bloomberg consensus of 215,000 by an impressive 102,000. It’s not that the labor market has completely recovered from the deep wounds inflicted by the Great Recession. It hasn’t. But there has been notable progress.
The missing ingredients – wage growth and the labor participation rate
One thing that has been holding back the economy and limiting gains in consumer confidence has been the lack of wage growth. We can always find anecdotal examples of rising wages in high-demand fields, but overall, salaries aren’t rising very quickly. Included in Friday’s nonfarm payroll report, the Bureau of Labor Statistics reported that average hourly earnings in September was unchanged from the month before. Year-over-year, growth slowed from 2.1% in August to 2.0% in September – see chart below.
Eventually, increased job growth and a falling unemployment rate (down to 5.9% in September from August’s reading of 6.1% – BLS) should encourage faster wage growth, which in turn would likely provide added support for consumer spending.
We still face a problem of “under-employment” and a dismal participation in the employment market relative to the overall population. According to ZeroHedge.com, the Labor Participation Rate has now dropped to a 36 year low with a record 92.6 million Americans not in the labor force. See chart below:
We continue to be underweight stocks/equities in our allocations for all risk levels at this time. We will be re-balancing portfolios over the next week in an effort to maintain our goal for specific holdings for all portfolios based on risk. Fixed Income/bond assets will remain diversified, with exposure to various types of bonds, from corporate to foreign. We would anticipate interest rates to either move sideways or lower through year-end, which should benefit our current positions. We will keep you advised.
Be sure to call today and schedule your quarterly/year-end review if you have not already done so. We can schedule your meeting for either in person or by phone. Also, we want to introduce and set you up on our new interactive financial planning/management program.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 New York Mercantile Exchange front-month contract; Prices can and do vary; past performance does not guarantee future results.
5 London Bullion Market Association; gold fixing pricing at 3 p.m. London time; 2013 year-end price fixing at 10:30 a.m. London time; Prices can and do vary; past performance does not guarantee future results.