For two weeks, participants in the financial markets have belabored the definition of “recession,” so it seems only fitting that the actual labor market would give us the latest economic data to dissect. On Friday, the Bureau of Labor Statistics reported that the U.S. added 528,000 jobs in July, more than double the average analyst prediction; and the broadest measure of unemployment, the U-6 rate, remained at its lowest level since the data series’ inception in 1994. Also, average hourly earnings for employees rose 0.5% in July, marking the third straight month of acceleration in wage gains.
One bearish signal in the jobs report repeated by many commentators was the slight drop in the official Labor Force Participation Rate last month to 62.1%, which is significantly lower than the pre-COVID number of 63.4%, which itself was significantly lower than the participation rates during the 1980s through the early 2000s. However, using this number to gauge the American public’s willingness to work can be misleading, as the domestic labor pool has made some demographic changes throughout the years. The official Labor Force Participation Rate looks at the workforce of people 16 and older, but the increase in college attendance amongst younger people and the large cohort of baby boomers entering retirement age ensure that there are large groups at both ends of the current labor pool that have rather tenuous attachments to the job market. If we look just at people in the prime working ages (25-54), the participation rate actually went up last month to 82.4%, and, while it remains below its January 2020 pre-COVID level, looking at the graph below shows that it is higher than its average level over the last 10 years.
It was noted with surprise by many commentators that equities did not have an extremely negative reaction to the news of a possibly overheating labor market. By Friday evening, the futures market was pricing in a two-thirds chance of a 0.75% hike in the Federal Reserve’s benchmark short-term interest rate at their next policy meeting in September, up from the 34% probability of such a hike on Thursday. Interest rate increases can be a bearish signal for stocks, but economic growth is the ultimate bullish signal. Thus, the importance of the second quarter (Q2 2022) corporate earnings season for S&P 500 companies which was almost finished by week’s end. The market has reacted very positively to quarterly earnings-per-share (EPS) announcements that beat expectations, with companies with positive surprises seeing a 2.1% average bump in share price during the period of their announcement compared to only a 0.8% average bump over the last five years. What’s even more interesting is that companies with negative earnings surprises have not seen their stocks drop, when negative news has led to a -2.4% drop in recent years (see the chart below). The reason given for the market’s overall positive attitude is that companies have been a lot less negative about third-quarter guidance than expected.
All of this does not mean that we are in a blockbuster economy. There are obviously serious problems from consumer sentiment to global supply chains. However, what last week’s data does emphasize is that we are in an unusual environment – but maybe not an unprecedented one. Some economic observers have drawn parallels between our current circumstances and the economy of 1947. The second and third quarters of that year saw real GDP decline, but the National Bureau of Economic Research (NBER) didn’t declare it a recession because of positive growth in employment and consumer spending. The country was coming off a period of massive government spending to fight WWII, and the transition from a wartime to a peacetime economy tied many supply chains into knots – conditions very similar to our post-COVID economy of 2022. Eventually, all the post-war adjustments did lead to an official recession about a year later in November of 1948, so whether history will repeat itself remains to be seen.
Past performance is no guarantee of future results. Trend signals are proprietary research of EWM Investment Solutions, a wholly owned subsidiary of Executive Wealth Management, LLC. Data source for returns is FactSet Research Systems Inc. This chart is not intended to provide investment advice and should not be considered as a recommendation. One cannot invest directly in an index. Executive Wealth Management does not guarantee the accuracy of this data.
On Tuesday, August 2nd, the Equity Growth model reduced its cash allocation in order to add more exposure to the internet retail industry. On Wednesday, August 3rd, the Emerging Growth Companies equity model eliminated a holding in the communication services sector in order to increase exposure to consumer staples stocks.
There were no other trades in EWM Investment Solutions models during the week ending on August 6th, 2022. All major equity market sectors are currently in a long-term unfavorable trend, and the Asset Allocation models remain at their lowest possible tactical equity exposures, with domestic stocks favored over international shares.
Quote of the Week
Out & About
Join the EWM team in supporting this year’s Livingston County Walk to End Alzheimer’s! Anyone is welcome to join us in the walk on September 24, 2022, or you can simply donate to the organization. Learn how to become more involved by clicking the link below!
We are excited to formally introduce four additional partners to the firm, totaling nine owners, retroactive to January 2022. These additions include Albert P. Herzog IV, Robert B. Larsen, Zachary Messina, and James A. Plaskey, Jr.
The firm is beyond excited to expand our group of owners to serve better our clients, employees, and communities we work in for years to come.
A Live With Confidence Minute: Compassion
A Great Dane with a Great Bladder
‘This clearly was a Great Dane with a Great Bladder,’ stated an auctioneer after selling a portrait of Juliana and one of two Blue Cross medals the dog earned for extraordinary acts of courage in WWII.
In 1941 Germany was dropping countless bombs designed to start fires over Britain. Once, such a device made its way into a shop owner’s home and began a fire threatening to burn down the residence and residents. Juliana quickly jumped into action and urinated on the device, putting out the flames, earning her a Blue Cross medal.
The canine’s second medal was earned after alerting the homeowners of another fire in the owner’s shoe shop, allowing them to flee to safety.
Julianna died in 1944 after being exposed to poison delivered to the owner’s letterbox, possibly saving lives again.
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Returns are calculated as indicated below with reinvested dividends not considered except for the Barclays U.S. Aggregate Bond Index. Data source for returns is FactSet Research Systems Inc. The London Gold PM Fix Price is used to calculate returns for gold.
1 Week = closing price on August 26, 2022 to closing price on September 2, 2022
1 Month = closing price on August 2, 2022 to closing price on September 2, 2022
3 Month = closing price on June 2, 2022 to closing price on September 2, 2022
YTD = closing price on December 31, 2021 to closing price on September 2, 2022
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