Weekly eLetter 1/6/2023 – A Terribly Strong Economy
The Fed may as well have said “Things will never get better as long as they are this good.” Oh well, not much we can do except have pity on the Fed governors who suffer with such conundrums.
What we are pondering here are the seemingly contradictory forces pushing simultaneously on: 1) the economy, 2) interest rates and 3) investor confidence/fear.
As we have discussed a few times in the recent past: the Fed is a big believer in the Phillips Curve. That’s the principle that says inflation and unemployment are inextricably tied — that they sit on opposite ends of a seesaw. In other words, for inflation to come down, unemployment must go up. Not everyone actually believes in the Phillips Curve but that doesn’t matter as long as the Fed believes it, it will be a strong contributor to policy.
Mechanically speaking, the Fed’s strategy is that the raising of interest rates will cause businesses – who usually have debt/interest expenses – to reduce spending in other categories, like employee costs. The increase in joblessness will create a reduction in aggregate consumer demand and voila! — sellers of stuff will reduce prices: ergo, reduce inflation.
Here’s what’s frustrating the Fed, and therefore also us. A whole bunch of companies ARE cutting back on workforce — some in very big numbers. In the IT/Tech world alone about 150,000 workers have been let go over the past few months. This week Amazon announced a cut of 18,000 and Salesforce said they are looking to cut ten percent of their workforce. High-profile names that have also trimmed staff include AirBnB, Meta (Facebook), Carvana, Target, Walmart and quite a few others.
And yet, data continues to come in showing that, in general, ‘the economy’ is quite happy with keeping employment levels high. One data point is the JOLTS survey (done monthly by the BLS). JOLTS is an acronym for Job Openings and Labor Turnover Survey – a count of available jobs added vs jobs lost. For each of the last three months JOLTS showed MORE job openings than losses, and indeed even more than what had been predicted. That means the workforce is growing, not shrinking. Another important tracking number is the number of people filing for unemployment assistance. The latest version of that data point also points to FEWER people becoming unemployed. Oh no! The poor Fed! (And us too.)
We find it ironic that while the pundocracy and the policy makers ponder the probabilities of a soft vs a hard landing, it is also beginning to make us wonder if there will actually be any kind of landing at all.
Ron’s Market Minute – Some Current Trends January 2023
Happy New Year once again!
There have only been a few years over the past 30 when I was truly glad to see an old year end. This is one of those times.
It typically takes a couple of weeks to notice any significant changes in market trend behavior. The big picture of the US equity markets over the past month, quarter, and year has not been pretty. The S&P Index* is marked with lower lows and lower highs- the traditional definition of a down-trending market. We’ve included a chart (below) which gives a general picture of the S&P Index- which we do not hold at this time- over the past 30 days. That index is shown by the light green line in the chart represented by the ticker SPY. That index is down about -4.6%.
(Chart source: FastTrack Software)
The other lines are our two largest holdings at this time. The red line is the ticker VGK – the Van Guard ticker which represents global stocks in Europe. Not overly exciting, but with a barely positive return, it has rather out-performed the US markets. Finally, the dark blue line SOPIX represents a mutual fund investment that is the opposite (called an inverse) of the Nasdaq index- the US ‘tech’ Index. PSQ goes up when the Nasdaq market goes down. A mixed blessing. The Nasdaq has gone down, and our investment holding has gone up about +9.8%. Not happy to see the Nasdaq drop, but happy to have avoided some of the general drop in markets.
Markets tend to continue in their current direction until acted on by something that causes a change. Thus, we are not making a prediction based on 30 days of data. Right now, these are comfortable holds. The future, of course, is unknowable.
On the positive side, you can note that the past week or so appears to be trending up. Factually, the SPY index is UP over the past 6 trading days. (+0.8%!). This is the time period (Last 4 trading days of the old year and first 2 trading days of the new year) which some historians track as they look for a ‘Santa Claus’ rally. Historically, when this is a positive number, markets tend to have a positive January, and a positive new year.
We won’t bet our assets or clients assets on a few days action, however. So, we are positioned to at least anticipate NOT participating if the downtrend continues.
Ronald P. Denk, CFP®
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite D406A
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
Toll-Free (877) The-Denk
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