Given Tuesday's sharp drop in the market, questions again took center stage about the strength of the domestic economy and the dollar, as well as prospects about whether the Federal Reserve will raise interest rates sooner than later.
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While many headlines since last Friday's February jobs report touted “a better than expected February Employment Report” given the headline jobs print and the drop in the unemployment rate to 5.5%, drilling down into the data showed the report was far less rosy.
Wages have stalled, and the combination of severe winter weather resulted in a drop in hours worked during February. Moreover the U.S. continues to get lower quality jobs – with the hospitality and leisure category leading the pack, for example – that tend to be lower on the wage scale. Added to that, in the eyes of the Bureau of Labor Statistics (BLS), a part-time job is the same as a full-time job. To that point, it should be noted, a person getting two part-time jobs to make ends meet is counted as two jobs in the eyes of the BLS. Such silly math that doesn’t match the economic reality of the times.
The unfortunate trend of Americans falling out of the labor force continued in February to the tune of 354,000 jobs. Note that level of dropouts was greater than the number of jobs created during the month.
Aside from peeling the skin on the February Employment Report over the last several weeks, many other economic reports fell short of Wall Street expectations. A sampling of those misses include weak personal spending whiffing it two months in row; a month-over-month drop in the February ISM Manufacturing Index that marked the fourth-consecutive month-over-month decline in index; weaker than expected January construction spending and housing data; and an unexpected jump in January wholesale inventories.
We’ve also had companies like Macy’s (M) and Gap (GPS) warn about the impact the Pacific Port closure would have on their respective businesses. Odds are good, in my opinion, these are not the only companies that will feel a pinch as a result of the shutdown.
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As if all of that wasn’t enough, add in the renewed drop in oil prices as inventories continue to climb. That action will weigh on oil prices and could drive deflation. Remember the Fed’s mandate deals with jobs and inflation as you ponder the above, and the odds of a rate hike sooner than later seems less than likely. Even so, expect Wall Street to parse Fed Chairwoman Janet Yellen's post Federal Open Market Committee meeting commentary next week for sign posts on when the rate increase may happen. If you’re thinking you’ve seen this movie a few times over the last several months, all I can say is it sure seems like something out of "Groundhog Day."
Meanwhile, U.S. investors continue to pull funds out of exchange-traded funds (ETFs) that invest domestically in favor of those that invest outside the U.S. (Europe, China, India and so on), the correlation between quantitative easing (QE) and stock markets springs to mind.
Looking back at the cause and effect of former Fed Chairman Ben Bernanke’s QE playbook, it devalued the U.S. dollar, pushed down interest rates, and set the U.S. stock market on a tear. With QE over and the next move in rates going in the up direction, investors are turning to the more than 20 countries that have recently cut interest rates looking for a similar monetary policy stimulus induced take off in those markets. I’ve made such moves in The Thematic Growth Portfolio that I manage for Fabian Wealth Strategies by using exchange traded funds (ETFs), which offer a basket approach and offer more cost effective exposure than buying international stocks on their native exchanges. It pays to remember that commissions paid on trading eat away the returns earned on your securities.
So, your investing marching orders: Connect the dots, build your shopping list and be prepared to snap up shares of quality companies at favorable prices. Sound advice if you’re a new investor or a long-time one.