Happy Labor Day!

September 4, 2023

“Market timing recommendations have an impressive track record of being harmful to an investor’s financial health.”- Peter Bernstein

Happy Labor Day.  As we close the summer with the annual final barbeque, August slightly took the wind out of the sails of July.  However, last week managed to eke out some positive returns.

For the month, the S&P 500 finished up .84%, +2.03 for the week. Down Jones Industrial Average was off .65% for August but up 1.15% last week. The Nasdaq gained 1.12% for the month finishing last week up 2.47% Internationally, the FSTE 100 finished the month down 1.35% but up 1.56% for the week, the MSCI-EAFE followed down 1.5% for the month but up .29% for the week. Oil hit $85.55 up about 22% from the March low of $66.74. Interest rates remained relatively level with the 2-year yield on Friday of 4.87% (3.51% a year ago) and the 10-year yield of 4.185 (3.26% a year ago) stubbornly keeping the yield curve slightly inverted.

As we enter the final month of the third quarter, inflation popped up to 3.8%, indicating it has yet to be finished bringing pain to the middle class. The jobs report also showed a slowing of hiring with the jobs growth number coming in at 187,000 new jobs. And 877,000 were seeking work.  Looking back to after August 2022, the size of the labor force fell or moved sideways for the next three months. The unemployment rate declined.

If the same scenario plays out this fall and the labor force shrinks, the hope is the unemployment rate could drop back down again in the next few months.

There also could be another, less positive and probable, explanation for the large increase in the number of people seeking work in August. Maybe they need the spending money to keep their current standard of living considering high inflation and the depletion of their pandemic-era savings.

“This could also be a possible sign of stress, with households having to come back to the labor market to pay bills and maintain current spending habits,” said senior economist Sam Bullard of Wells Fargo. Economist have such a talent for stating the obvious.

Looking to the Federal Reserve impact, the 10-year Treasury bond is on track for a third year of losses in 2023, something that has not happened in 250 years of U.S. history. Bond returns have suffered this year as the Federal Reserve has continued its interest-rate-hiking campaign aimed at getting inflation under control. So, this is no time to pop the cork that the Federal reserve is finished raising rates and has made it abundantly clear that all options are on the table and 2% inflation target is all but carved in stone. However, Bill Adams, chief economist for Comerica Bank, writes that today’s jobs report was a dream for the Federal Reserve, pointing to cooler labor demand, more labor supply, and slower wage growth.

“Payrolls growth was about as expected in August but downward revisions to June and July lowered the recent trend,” Adams writes. “The jobs report widens the path for the Fed to pivot to rate cuts in the first half of 2024.” In a Barron’s article, Connor Smith wrote on Friday that “Following the report, traders are pricing in a 93% chance the central bank holds the headline interest rate steady at its September meeting, according to CME FedWatch Tool. That is up from 80% last week. Odds the rate holds steady over the next two meetings increased to 62.9% from 44.5% last week.”

Overall, the markets’ performance since the lows of October 2022 have been good, especially the tech laden Nasdaq. But, as the value rotation continues and prudence dictates, a more defensive posture allocations toward intermediate term bond and value stock both here and abroad makes sense. It is important to note that fine tuning a portfolio where necessary is not market timing. Fundamentally, it is your asset allocation modified by a few overriding factors that determine that allocation. As we grow older and our time horizon shrinks, recovery from adverse market cycles become more of an issue. Prudence dictates moving in more conservative arenas. Inflation and preservation of purchasing power is also a prime concern as retirees rely on that income to sustain their lifestyle.

This week, investors will be expecting data on the July U.S. international trade deficit and the ISM services sector activity for August on Tuesday, weekly initial jobless benefit claims data on Thursday, and the July wholesale inventories data on Friday. They will also tune into the speeches of a few Fed speakers, looking for clues on whether the central bank is ready to be done with its rates hikes.

One final thought as congress will reconvene next week with a budget fight brewing, Brian Gardner, chief Washington policy strategist at Stifel, emphasized that history in a note to clients.

“Headlines regarding a potential budget impasse will grow and there could be a whiff of panic in the air, but investors should take all of this in stride. Markets tend to ignore the impact of a government shutdown,”

Our portfolio strategy reflects this defensive posture and we will introduce new money overtime and continue to look for opportunities to stretch the yields on our short-term bond investments.

Enjoy you holiday….

Mike