Category Archives: Economy

The Dog Days of Summer

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ECONOMIC COMMENTARY
August 15, 2017 – 

 

August 15 is supposed to be right in the middle of the dog days of August. But we learned recently that the phrase “dog days of August” relates to the period that Sirius, a star known as the “Dog Star,” rises at the same time as the sun. This period is typically in late July until early August. Thus, the phrase is also known more generally as the “dog days of summer.”

What does the dog days of summer mean for the markets? Not only are families taking vacations, so are institutions. The Federal Reserve Board’s Open Market Committee does not meet in August. Congress is in recess and the President is on a long working vacation. Even equity traders and market analysts are on vacation, which typically results in lower trading volume for stocks, bonds and more. Thus, everyone should be taking a long-deserved break during August.

Does that mean that the month will be completely quiet? We can’t really predict a complete time of rest for the markets. Traditionally, during times of lower trading volume, any type of major event could produce more volatility than usual. And, though it seems that everyone in D.C. is on vacation, the world does not go to sleep. Nor does the weather. For our part, we do hope that everyone has a restful remainder of the summer and that the quiet enables those economic sleeping dog days to lie about as well.

A personal note.  I was lucky enough to be the low qualifier and therefore the #1 seed in our Club Championship at Cripple Creek Golf & Country Club to be played this coming weekend.  I was very fortunate to shoot a one over par 73 which included a chip-in eagle on the 18th hole.

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The Economic Expansion Continues

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ECONOMIC COMMENTARY
August 8, 2017 –

 

The long road back from the Great Recession began in mid-2009 and July marks the 96th month of recovery. This makes it the third longest expansion on record, and if we continue at the present pace, this recovery will become the second longest expansion in history in the middle of next year. There are two reasons for the length of this recovery. First, the Great Recession was a very deep recession, thus we had a very long road back.

Second, the recovery has been slow and steady. Even though our growth has not been strong, we have stayed out of a recession partly because the economy has not overheated. If the economic expansion did heat up, then interest rates would be much higher and this could endanger the recovery. We have enjoyed very low interest rates for the past decade and this year is no exception.

Nowhere is the length of the recovery more evident than the jobs market. The economy lost close to nine million jobs in a very short period of time. In the decade that has followed, we have added approximately 17 million jobs. While these are really strong numbers, we have only added eight million jobs net of the recession, and this averages out to less than one million per year over the past decade. This helps us put July’s job numbers in perspective. We added just over 200,000 jobs for the month with an unemployment rate of 4.3%, both solid numbers. We still have some work to do in creating better paying jobs and taking care of those who have left the workforce but did not retire. However, we have come a long, long way.

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Jobs and the Fed

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ECONOMIC COMMENTARY
August 1, 2017 – 

 

Last week’s meeting of the Federal Reserve Board’s Open Market Committee was not so much about what they would do when they met. It was more about what they would say about the future. The two topics of interest were future interest rate hikes and selling off their stockpile of assets, which is comprised of bonds and home loans. Obviously, both of these topics might affect the direction of rates and are subject to change based upon the direction of the economy and any intervening factors.

The Fed does not meet again until September and that leaves more time to access the state of the economy. This week we have the first major data release since the meeting. The July jobs numbers are all important with regard to their decision-making process and we will also have the August jobs numbers released before they meet again. The preliminary growth estimate for the second quarter was released last Friday and these numbers will be revised at the end of this month.

Of course, we can’t predict what intervening factors might arise. In the past, we have had major world-wide economic, political and weather events which have affected the markets. And we certainly are not trying to predict the occurrence of a particular event. Whatever the Fed said, we are just pointing out that their statements are subject to change as the summer comes to a close in the next several weeks.

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Another Balancing Act

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ECONOMIC COMMENTARY
July 25, 2017 –
The Federal Reserve Board meets this week to decide what to do with short-term interest rates. With Chairperson Yellen having testified before Congress recently, the tone of her remarks has led the markets to believe that there is little chance of a rate hike this time around. However, analysts will be watching for any wording in the announcement regarding the Fed starting to sell off their bond and mortgage assets later this year. As usual, the Fed is trying to maneuver through a delicate balancing act.

Recent moves to raise short-term rates demonstrate that the Fed is comfortable with the current state of the economy. However, if the Fed floods the market with their assets, this could cause a rise in long-term rates, which might in turn slow down the economy. Thus, the Fed will need to carefully divest itself of these assets taken on during the recession and long recovery. Just as Yellen has indicated that the Fed is looking to raise rates gradually, the selling of these assets will need to follow the same course.

The good news is that recent economic reports have shown inflation to be under control. Absent the threat of increased inflation, the Fed can be more deliberate when implementing these actions. At this point, there seems to be no sign that the economy is quickly gaining steam. Of course, with the first reading on the second quarter economic growth and the August employment report coming out shortly, the balance we currently are seeing could change very quickly.

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The Brexit Adjustment

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ECONOMIC COMMENTARY
July 18, 2017 –

 

Sometimes it is hard to explain why certain things happen in the markets. Much of the time the markets seem to have a mind of their own, and market analysts are reaching for explanations as to what happened after the markets moved in one direction or another. Of course, usually there are several factors affecting the markets at once and it is typically impossible to determine which is the dominant factor.

For example, let’s discuss the recent movement in interest rates. The Federal Reserve Board has raised rates three times in the past six months or so. To the public, this would indicate higher rates to borrow money to purchase homes or cars. But as we have indicated previously, the Fed controls short-term rates and they have an indirect influence on long-term rates. Indeed, the Fed has raised short-term rates by 1.0% overall, but as of a few weeks ago, long-term rates for home loans had barely moved half of that amount.

One reason long-term rates have not moved is the fact that the economy is not overheating and there is no sign of inflation. Job growth continues to be solid, but the economy grew by less than 2.0% in the first quarter. Then why did long-term rates start rising more recently? Remember Brexit and how the markets were worried that slow growth in Europe would affect our economy? Well, apparently Europe has shaken off the Brexit worries and growth is stronger than expected overseas. Like here, there are no signs of the European economies overheating. Thus, while rates remain low, the fact that Europe appears to be awakening from their slumber has put some pressure on the bond markets, and thus our long-term rates.

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Jobs and The Cost of Housing

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ECONOMIC COMMENTARY
July 11, 2017 – 

 

Last week we counted our blessings with regard to the shape of the economy. This week we will talk about the release of the June jobs numbers which give us another reading regarding the health of the economy. Overall this reading was stronger than forecasts. Thus far this year, job growth has been solid, with just over one million jobs created in the first half of the year. This compares to 2.2 million jobs created in 2016, which puts the economy on track to match last year’s numbers. Despite strong jobs growth for the month, the unemployment rate rose to 4.4% last month, but that is not necessarily a bad thing, as it typically means that more long-term unemployed are re-entering the workforce.

Just as important as the jobs created, wages increased by 0.2% last month and 2.5% over the last year, which was slightly lower than economists expected. Higher wages are important, because they positively influence consumer spending for big ticket items. For example, if wages do not go up as fast as the cost of housing, this provides a burden on renters and discourages home buying as well. Recently, home price data for April, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, showed another record high — the fifth consecutive month of new peaks. Does that mean that housing will become unaffordable?

We caution you against reaching that conclusion. The First American Real Home Price Index currently shows that housing prices are still around 33% below their peak. To calculate the “real” cost of housing under the Real Home Price Index, incomes and mortgage rates are used to inflate or deflate house prices which are unadjusted for inflation in order to better reflect consumers’ purchasing power and capture the true cost of housing. It should be noted that lower interest rates do not directly benefit renters. The message? As long as rates stay low, housing is still more affordable today than it was when peak prices were achieved a decade ago.

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Half-Way There

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ECONOMIC COMMENTARY
June 27, 2017 – 

 

We are approaching the half-way point of 2017. We can make an observation that it has been a very strange year. And we are not just talking about the political turmoil. For example, despite the fact that the Federal Reserve Board has raised short-term interest rates for the third consecutive quarter, we still do not have a fix on how strong the economy is right now. In their statement accompanying the increase two weeks ago, the Fed expressed optimism that the economy was getting stronger. Yet, every economic report released that week was disappointing, including readings on retail sales and industrial production.

Even though just about everyone was expecting rates on home loans to rise significantly this year, this uncertainty is one reason that mortgage rates are lower than the analysts expected. One would hope that the upcoming June jobs report would lend some certainty to the equation, but thus far this year, we have even seen ambiguity within the employment sector. The unemployment rate is dropping, but the pace of jobs added has not accelerated from last year.

Despite this uncertainty, the stock market has remained strong this year as the post-election rally has continued. Does this mean that the markets are optimistic that it is only a matter of time before the economy shows signs that it is picking up? Or is this rally merely a reaction to improved corporate profits? We feel that the picture will become clearer over the next several weeks, as we see additional jobs reports and a reading on the growth of the economy for the second quarter. For now, the lower long-term rates should be helping the economy in conjunction with higher stock prices.

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