Can I Have Some More, Please?

By Monument Wealth Management Team | Aug 25, 2014 | Weekly Market Commentary

It was a great week in the markets. The S&P 500 experienced another strong round of gains, economic data continued to show that the U.S. and the rest of the world is growing (albeit rather slowly) and investors’ nervousness eased as tensions receded in Ukraine.  All of this leads me to say, can I have some more, please?

In my mind, the 4% pullback that started at the end of July and spilled into the first part of August was just another buying opportunity for anyone who had some spare cash to invest.  On the flip side, if you sold your stocks because you thought the drop was going to turn into something worse, then we’re sorry to hear that.  The S&P 500 once again reached a record high, so we don’t advocate trying to time the market.  Unless you need cash for a specific reason, stay invested until we start to see broader signs that the economy is slowing down.

Cyclical sectors did especially well, with the financials, industrials, consumer discretionary, and technology sectors all posted gains of more than 2.0%. Small-caps are almost back in positive territory for the year, but they are still trailing their large-cap counterparts, like the S&P 500 and the Dow, by a wide margin.

Economic Data Update

The table below shows all of the economic data that was released last week, courtesy of our friends at Bespoke Investment Group. There were eleven items that were announced: nine of them (highlighted in green) came in above estimates, one came in right at the estimate (highlighted in blue) and one was weaker than expected (highlighted in red).

In my opinion, there are two bright spots that we can take away from this.

The first is that the labor market seems to be getting better. Unemployment claims fell last week (see the line that says “8/21 Initial Claims (‘000s)”), furthering its long term trend of better and better jobs data.  Employment is arguably the biggest driver of the markets, so it makes sense that this trend is a friendly sign for the equity markets.

The second is that the housing market also seems to be improving. Take a look at housing starts, building permits and existing home sales – all three of those items came in better than expected.  Housing is a fundamental driver for the economy and the growth that’s occurring in the labor force mentioned above should continue to boost housing activity.

You can’t jump to any conclusions on just one week’s worth of data, but if you look at the numbers for housing and employment over the past five years, it’s clearly heading in the right direction.

Yellen’s Speech

One noteworthy event that occurred last week was an economic symposium hosted by the Federal Reserve where Chair Janet Yellen delivered a speech on the state of the U.S. economy. Her tone seemed fairly balanced and it doesn’t appear like any new policy changes are headed our way.  Basically, no surprises.

However, she used one particular word 25 times which, to me, means it must be important to her.  That word is “slack”.  Slack, from an economist’s point of view, is the difference between where the economy is now versus where it could be if it were fully utilized.  For example, unemployment doesn’t have to be zero, but if there are able-bodied people who want to work but they can’t find a job, then she would consider there to be slack in the labor market.

Unlike most items that the Fed keeps track of, it’s not a data point that can be easily measured, like the number of homes sold last month.  It’s not something that’s made up, but she can’t just open up the newspaper to get the latest reading.  It’s more complicated than that.

Why is she using this word so much?  My guess is to give the Fed some leeway as to when they decide to raise interest rates.  If inflation hits the Fed’s stated target of 2.0% but Yellen believes that there is too much slack in the job market, then they might delay moving interest rates.  On the surface, this reasoning makes sense:  why raise rates, which could hinder growth, if there is still room to grow?

The bottom line is that there is not a magic number that the Fed is waiting for before they decide to take action.  Let’s just hope that they continue to be transparent with their decision-making process so investors’ portfolios aren’t adversely affected by any potential interest rate shocks.

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