Labor Pains
After barreling down the highway most of the year, investors are starting to wonder if maybe 110mph is perhaps too fast. Starting roughly four weeks ago, the markets began to slow as valuations, particularly with technology stocks, came into question. Investors have taken some chips off the table ahead of what is traditionally the second weakest month of the year. As we rebalance portfolios, we too are taking some gains and bringing position sizes back in line with model allocations. While we don’t believe this is the beginning of a secular bear market, we do recognize that the markets are a little “out of whack” and could experience some volatility in the near term. While diversification hasn’t exactly been a winner this year, it will likely help mitigate downside risk in the months ahead.
While inflation has come down significantly in the past twelve months, it remains the foremost issue the Fed has on its plate. The remaining bits of inflation to be wrung out of the economy remain the most difficult. More recently, oil and gas prices have ticked higher due to production cuts by OPEC and a renewed interest by those countries to take back control. Additionally, confounding labor market data in the form of falling initial jobless claims (for the fourth straight week) have all eyes on the Consumer Price Index which will be released next Wednesday. Next week’s CPI report will be the last one before the central bank’s monetary policy committee meeting on September 19 and 20. The Fed is widely expected to hold rates steady, but economists remain divided on whether another rate hike is warranted later this year.
There are signs that the economy is cooling off. Declining inventories and falling factory orders are two indicators. Another is mortgage applications which have declined to the lowest level since 1996. From purchasing to refinancing, homeowners and those wishing to be homeowners have put things on hold for now. Perhaps this shouldn’t come as a surprise as the 30-year fixed-rate mortgage is 7.21%. Between low housing inventory and elevated mortgage rates, prospective home buyers are on the sidelines.
Having said that, the Fed Beige Book released this week indicates consumers continue to spend. If you’ve been a long-time reader of mine you’ll know this is perhaps my number one indicator of the direction of the economy. I was going to say economic health, but consumers spending recklessly isn’t exactly healthy. According to the report, the U.S. economy grew at a modest rate during July and August. Summer can take some of the credit as consumer spending on tourism was stronger than expected, “surging during what most contacts consider the last stage of pent-up demand for leisure travel from the pandemic era.” Notable, “other retail spending continued to slow, especially in discretionary items.” And lastly, labor problems persist as hiring has begun to slow in part due to the imbalance and availability of skilled workers.
On the subject of workers, the UAW looks poised to strike next week as the latest concessions from Ford, GM, and Stellantis do not appear to be enough. The UAW reiterated that 97% of its members voted in favor of authorizing a strike if an agreement is not reached before September 14. The key concessions the union is looking for are a 46% pay raise, a 32-hour work week with 40 hours of pay, and pension benefits for new hires. Yet more widespread, labor issues persist as productivity in Q2 was revised lower and the cost of labor higher. Time will tell just how long this dynamic can continue.
In closing, we’ve all heard the idiom “opposites attract” as a way of saying that people who are very different from each other are often attracted to each other. However, this little tidbit that we all take for granted, may not be true after all. Recent research suggests that most partners have shared traits including political views, education levels, and drinking habits. A study on romantic relationships found that for more than 80% of traits analyzed, partners were often remarkably similar. Perhaps the proverb “birds of a feather flock together” is more apropos. When I mentioned this to my wife and suggested that we are not so dissimilar after all, she took issue with the study. Now you know.
Bruce J. Mason, MBA