Workers have jobs. The headline unemployment rate at 5.1% proves it, right? Yet the percentage of working-aged folks in the labor force at 62.6% represents the lowest employment rate since the late 1970s. Equally troubling? Wages/salaries rose a mere 0.2% in the second quarter. That was the smallest increase since data on wages have been kept. In fact, when adjusted for inflation, median household income has actually dropped since the Great Recession ended in June of 2009, from roughly $55,000 to approximately $53,650 today.
The economy is expanding, though. And things cannot be that terrible when the economy is growing, right? Unfortunately, the pace of growth has remained at the same fragile 2.0% for six years. The best that Warren Buffett could say about the U.S. economic situation was, “Not bad.” Keep in mind, the global economy is decelerating at a rapid clip with scores of influential developed and emerging nations fending off recessions. Meanwhile, the Organization of Economic Cooperation & Development (OECD) anticipates that the global slowdown will continue throughout the rest of 2015 and into 2016.
Maybe the U.S. is an economic island that is unaffected by trouble around the world. After all, Jim Cramer might tell you that our consumer-oriented economy is relatively independent, while simultaneously begging the Federal Reserve to declare 2015 a rate-hike-free zone. Or maybe the increasing trade deficit as a result of weaker exports will drag on the domestic expansion. (Note: The World Trade Organization explained that trade growth has averaged only 3% a year since 2010, compared with 6% annually from 1983 to 2008).) Or perhaps the significant declines in foreign sales and foreign profitability will be more difficult for U.S.-based corporations to mask when reporting 3rd quarter revenue and earnings.
The incongruence doesn’t stop at the doorstep of employment or the broader economy. Consider the wonderful news on homebuilder confidence. The National Association of Homebuilders (NAHB) has a monthly sentiment index that hit 62 – far above the positive-negative demarcation line of 50. The enthusiasm has not been this high since the end of 2005, when real estate sales and mortgages first began disintegrating in earnest. Perhaps ironically, existing home sales today are a fraction of what they were at the tail end of 2005, while mortgage applications are far from their peaks in 2012 and 2013; mortgage applications have been relatively flat since 2013.
What we have, then, are a number of incongruent realities. Some emphasize that, for the most part, employees are employed and that the economy is, for the most part, standing on solid ground. Others (myself included) highlight that the overwhelming majority of U.S. citizens are struggling to get by on part-time roles, two jobs and/or low paying positions. We might also add that the economy is not on solid ground, as it has required $7.5 trillion in federal deficit spending, $3.75 trillion in Federal Reserve electronic money creation and emergency level zero percent rate policy for nearly seven years. Moreover, higher rates would likely send a chill through real estate-related businesses.
How does this all impact the investing community? Why, Thursday’s must-watch Federal Reserve decision on rate policy, of course. The S&P 500 SPDR Trust (SPY) has been rallying for all the wrong reasons leading into the central bank’s decision. Specifically, weak U.S. manufacturing data, China’s ongoing stock volatility, deflationary CPI drop, FedEx miss, HP layoffs, White House-Congress impasse – the combination of the bad news has led investors to conclude that the Fed will wait to raise borrowing costs and/or unequivocally state that the pace of any hiking activity will be ridiculously watered-down.
However, bad economic and/or bad political news may only be able to take the good vibrations on “ultra-accommodating rate policy” so far. Technical resistance for benchmarks like the S&P 500 are strong at the 2000 psychological level and the 200-day moving average (2069). Third quarter earnings season is likely to be a headwind as well, due to the high likelihood that revenue and earnings will decline; higher prices are not typically associated with falling sales and falling profitability. Last, but not least, the Fed may not provide the financial markets with the news that is currently anticipating. Chairwoman Yellen and her colleagues may simply decide that it is time to hike, if for no other reason that they will need ammunition to lower borrowing costs in 2016 or 2017.
For the majority of my moderate growth and income client base, I have maintained a lower risk portfolio than is typical. Throughout June, July and August, I explained the dozens of fundamental, corporate, macro-economic, technical, historical and practical reasons for raising cash/cash equivalents to 20%-25%. Similarly, we lowered our target 65%-70% equity (e.g., large, small, foreign, growth, value, etc.) down to 50% higher quality larger cap stocks, while the 25% in bonds have been devoted to investment grade.
A sampling of out stock holdings? Prominent ETFs include, but are not limited to: iShares S&P 500 (IVV), iShares Russell Mid-Cap Growth (IWP), Vanguard High Dividend Yield (VYM) and SPDR Select Sector Health Care (XLV). In some instances, we’ve been bargain hunting in the value bin. On companies that have been knocked for 30% bearish losses already – on public corporations that have current P/S ratios below 0.7 and below average 5-year P/S ratios – we’ve accumulated modest amounts. Kohl’s (KSS) near 50 met our “value” criteria, especially with its substantial real estate ownership, attractive price-to-book and 3.5% dividend yield.
Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.