Contributed by Alan Leist, III
Stocks sold-off in another volatile week as global growth concerns and, oddly, worries about the timing of a Fed rate hike weighed on the minds of investors.
“The Only Thing We Have to Fear…” The Fed has not raised rates in almost 10 years and the market has fed (excuse the pun) on easy money for many years.
- The time may be approaching for a regime change in rate policy, but it would come at a time when global growth remains challenged (see China).
- Stocks are selling-off because investors do not like the tension of U.S. rate hikes in the midst of global stress.
- The reality is that the U.S. was ahead of the curve in reacting to the crisis. We must now start to normalize policy, albeit at a measured pace, in response to better economic conditions. Ultimately, this is Good News.
Start Your Engines: In one sign of strength at home, U.S. auto sales hit their highest levels since 2005.
- GM said the avg. sale price=$34,000, +$600 YoY (WSJ).
Ahead of the Labor Day weekend, we take a look at the health of the labor market following the monthly jobs report. (aka “The most important report in history”)
Mixed Report: The August jobs report garnered a fair amount of investor attention. This was the last report before the Fed meets in September to consider a rate hike. However, investors who were looking for clear signs from the report were left disappointed.
- The U.S. added +173K jobs (consensus: +220K).
For vs. Against: On the surface, the headline miss may send cautionary signals to the Fed. Not only were payroll gains lower than consensus but they also came in below the average year-to-date gains of +218K.
- However, the August jobs report is notoriously unreliable due to the start of school. Strong upward revisions often come in the months that follow.
- Furthermore, strong performance on two key fronts, average hourly earnings and the unemployment rate, strengthens the case for a Fed rate hike.
Inconclusive Data: Despite the relatively steady and consistent performance of the U.S. economy, many investors have questioned if the Fed will raise interest rates following recent global market volatility. As the labor markets inch awfully close to targets highlighted by Fed, we feel that this labor report will only strengthen the conviction of those officials who were already leaning towards a September rate hike.
Looking Ahead to Next Week
“Hey Siri”: Strategic holding Apple is expected to announce the latest version of the iPhone, along with a larger iPad Air, revamped Apple TV and upgrades to the Apple Watch at its Wednesday event.
- With the product event taking place in a larger venue than ever before for Apple, some tech enthusiasts are wondering if we may see “one more thing”.
Big East: China will be releasing trade, inflation and retail sales data next week after many have named them the root cause for recent market pullbacks.
- In a slow week for domestic data, investors will be scrutinizing these figures for any clarity that things may be stabilizing overseas.
Hurt Feelings: The latest University of Michigan consumer sentiment index data will be released Friday.
- Index data is expected to hover near a three month low as volatile stock markets have likely shaken consumers and their confidence in the overall economy.
Kickoff: The 2015 NFL season officially gets underway on Thursday as the Pittsburg Steelers take on the newly vindicated Tom Brady and the New England Patriots.
Investment Strategy Update
STRATEGIC Asset Allocation
Guessing Game: The jobs reports sent a mixed message to those handicapping Fed intentions. Risk markets continued their recent moves down while bond markets offered some diversification benefits. Although the prospect of a Fed rate hike kept gains in check for fixed income.
Summer Sendoff: While the jobs number is a key data point, much of the week’s action occurred on thinly staffed trading desks as Wall Street relocates to the Hamptons this time of year. Also, China was on vacation for a national holiday.
Well-balanced: While equity market declines have clipped portfolio allocations, the moves have not yet become significant enough to warrant more rebalancing.
Shaking the Tree: We shook out a long time holding in consumers and moved the proceeds to two new investments in the sector with a stronger growth profile. In other news…
- Dollar Tree (DLTR) reported its quarter this week. The company reported earnings and same-store sales numbers that missed the mark. Also, the company removed its forward guidance because the Family Dollar acquisition.
STRATEGIC Equity Income
Egging It On: Consumer stocks led the way despite crude prices moving higher. In other strategy news…
- McDonald’s (MCD) posted 1.7% same-store sales growth for the month of August. While traffic fell 1.1%, spending per purchase was 2.7% higher. The company also announced that October 6th will mark the start of all-day breakfast. The added demand for eggs may drive egg prices higher especially since the bird-flu has decimated production.
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