FROM OUR INVESTMENT COMMITTEE: Economic Brief: Labor Market Remains Tight As Global Risks Rise
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
Article from our investment partner: Buckingham Wealth Partners by Larry Swedroe, Chief Research Officer
summary
Main Takeaway: While inflation has moderated since June, it remains stubbornly high, and the Federal Reserve took further action by raising its benchmark rate again in September. Shocks happening abroad are the main contributor, and speculation about the world entering recession early next year has risen.
Top Risks: The war in Ukraine has led to a dramatic increase in gas prices, with Europe facing limited supply to heat homes and power factories this winter. This will impact nearly every good produced in the region, from wine glasses to fertilizer. In the U.S., housing costs are likely to keep inflation higher.
Sources Of Stability: Employment remains strong, with the U.S. adding an average of 440,000 jobs a month this year. Consumers are seeing some relief at the gas pump as the price of oil has dropped. Home prices are also cooling, and lumber prices have fallen more than 70% from their March peak.
In The Spotlight
Unemployment Rate Ticked Up To 3.7% In August, Remains Well Below Recession Periods
Note: Seasonally adjusted. Shaded areas indicate U.S. recession periods. Source: St. Louis FRED data and Bureau of Labor Statistics.
The big paradox to the outlook for slower growth is the strong labor market, prompting the key question of whether the Fed’s actions to tame inflation will push up the unemployment rate. At the end of July, there were 11.2 million job openings compared with six million people unemployed in August, according to Bureau of Labor Statistics data. This has led to severe shortages in many occupations. Even so, the unemployment rate ticked up slightly in August, and the Fed raised its unemployment rate prediction for 2023 from 3.9% in June to 4.4% as of its September FOMC meeting.
WHERE DO MARKETS GO FROM HERE?
Markets tend to lead economic data: Markets tend to decline before economic data worsens, meaning reacting now usually means you are reacting after markets have already moved.
Expect volatility: There’s increased speculation right now on where inflation is headed and the nature and extent of any recession, and the market does not like ambiguity. The global geopolitical environment—particularly the cost of energy—can also be expected to continue to contribute to heightened volatility.
Note: Jobs added is based on nonfarm payroll employment reported by the BLS. The core consumer price index (CPI) excludes food and energy. CPI and producer price index (PPI) figures represent month-overmonth changes. Consumer sentiment is from the University of Michigan’s consumer sentiment index. Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, and University of Michigan.
Reacting after markets have fallen rarely works: Expected returns are now meaningfully higher in both stock and bond markets than they were at the start of the year.
Also, while nothing is guaranteed, both stock and bond markets tend to do relatively well after large negative return periods.
What are the investment planning implications?
Tax-loss harvesting: Take advantage of lower prices to lock in investment losses and offset any gains. Give yourself a tax break—if available.
Manage risk: Rebalancing keeps overall risk characteristics of the portfolio aligned with your financial objectives.
Look beyond stocks and bonds: Some alternative asset classes are doing what we’d expect—performance is not correlated to stocks and bonds, and they are providing both return and diversification benefits.
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