Short-Term Fix for a Long-Term Problem

Written by Ryan Bouchey

I’m not going to bore you with the details of today’s jobs report, but it was fairly weak considering the recent strength we’ve experienced. The U.S. created 75,000 jobs for the month of May vs. expectations of 175,000, unemployment stayed at 3.6% and wage growth slowed to 3.1%. My first thought with this number is – who cares? We’ve been averaging close to 200,000 jobs created per month since 2013. During this time here are some monthly job stats: December 2013 – 67,000; March 2015 – 77,000; May 2016 – 15,000; September 2017 – 18,000; February 2019 – 56,000. The point is, we’ve had bad months during this expansion before so May’s weakness shouldn’t be a concern until we see a pattern of weakness.

What’s more concerning is how this may impact the Fed and their future decisions. It’s amazing to me how positive the market has reacted to the growing probability of the Fed cutting rates, even as soon as this month following their upcoming committee meeting. Everyone is cheering that this will help keep markets going and improve the economy. That’s the short-term fix. The long-term problem is that historically interest rate cuts by the Fed is a negative signal, one meant to boost the economy. The Fed doesn’t cut rates when the economy is growing. As investors we need to ask ourselves, do we prefer a naturally strong economy (long-term) or an artificially strong economy (short-term) with the Fed’s help? Personally, I’ve liked the naturally strong economy and the gains we’ve seen in the stock market during the previous three plus years of interest rate hikes.

What does this all mean? Hard to say the immediate impact, but I’d be hesitant to get too excited over a Fed cut in interest rates with regard to your investments and overall allocation. Maybe this is a good thing for day traders trying to profit on headlines, however that is not how we invest. Here are some things to consider:

• The U.S. now has 104 consecutive months of job creation. The previous longest streak was 48 months, which we’re now more than doubled.
• We’ve experienced recent yield-curve inversions which historically have been a negative sign to the markets
• The unemployment rate and wage growth rate is now only 0.5% apart. As we discussed during our annual State of the Economy earlier this year, when these numbers converge and/or cross, its generally a negative market sign.
• July will mark the longest economic expansion in U.S. history.

These stats aren’t meant to call a market top or to suggest getting out of the markets. They are meant to bring the reality of the situation for long-term investors to the forefront – I’d be careful to get overly exuberant over the possibility of a Fed rate cut. Now is the time to re-examine your tolerance for risk and make decisions for the long-term, not the short-term. As an investment committee, we became more defensive back in February, and although we may have been early to the party the decisions were made with the long-term in mind, not the short-term.

 

This article was featured in the Saratogian and the Troy Record on Jun 8, 2019.