The highly anticipated September labor market report was announced during the week and the results could not have been more debated. The economy added 134,000 private jobs last month and the report was announced with a positive net two month revision of 87,000. The latter part means that previous reports were revised to represent even higher job creation than had been originally announced. The reason for the ensuing debate as to the health of the report stems from the fact that economists’ expectations indicated an estimate of 185,000 jobs. Although it’s true that the actual reported figure missed estimates, it’s critical to take into account the cycle of the current labor market and the immense historical upside that we have witnessed over the past five years. The idea that the labor market can produce new jobs in an infinitely strong manner is something that is not realistic, nor has it ever happened before. Our internal belief is that we have to recognize the high possibility that we’re currently in a late cycle mature labor market that has reached full employment. Data to support such a statement are associated with the 3.7% unemployment rate and the 7.5% underemployment rate. Additionally, the stabilization of the labor force participation rate since January 2016, well into September 2018, has been a very important indicator to support the notion of a mature labor market. As we look ahead about what this may mean, the current cycle of job creation ties in well with our internal belief that a period of neutral and/or weak economic demand may be on the horizon over the next 18-24 months. This does not necessarily mean recession but it can certainly appear in that form. Business cycles are healthy and normal occurrences that we must take into account as part of a sound and long-term risk management process. We’re fundamental believers that if risk management takes center stage within a financial plan and within a multi-strategy investment platform, then the long-term outcome may be one of higher success. Needless to say, we believe the latest labor market report was utterly positive and we were excited to see wage growth increase at an annualized pace of 2.8%.
In other economic news, we learned during the week that August 2018 consumer credit creation increased by $20 billion, much higher than the $15 billion anticipation. We have been adamant about the benefits of strong credit creation as a means of gauging near-term economic activity. Moreover, we can use the data to build a fairly positive undertone tied to earnings guidance for major U.S. companies. We remain optimistic in the short-term and remain ready to take advantage of volatility over the next 12 months, or maybe even longer, should the opportunities arise.
Global equity markets remained in negative return territory for the week, especially as it relates to emerging markets. The MSCI EM index closed the week lower by -4.48% while domestic U.S. small cap equities lost -3.86% (S&P 600 Index). The looming threat of trade tensions with China proved detrimental to risk sentiment for equities and the on-going rise in treasury yields domestically appeared to add fuel to the fire. The U.S. 10 year yield reached levels last seen in early 2011 and the impact to fixed income investments proved detrimental. The notion of a safe investment should not be entirely associated with fixed income (i.e. bonds) in an environment of rising interest rates. The Federal Reserve has vowed a tightening path for the foreseeable future, which has the potential to add further downside pressure to bonds and to companies needing more debt, such as those embedded within the S&P 600.
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Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.