To Ease Or Not To Ease… All eyes on the Fed!

September
11

Written by: Jon McGraw

It’s about time.

Believe it or not, the U.S. stock market as measured by the S&P 500 index hit an all-time record high last week when you include reinvested dividends, according to Bloomberg. Now, you may not have seen that headline in the news last week because the index itself is still 9.3 percent below its all-time high reached on October 9, 2007.

Here are a few other interesting stats to ponder:

  1. In 2012 alone, the rise in the U.S. stock market added $1.9 trillion to investors’ wealth.
  2. As of last week, the S&P 500 index rose 112 percent from its 12-year low reached in March 2009.
  3. Even though economic growth is sluggish, U.S. corporate earnings are projected to reach a record high this year. If reached, this would place earnings about 20 percent higher than 2007’s – the year the U.S. stock market hit its all-time high.
  4. By historical standards, “The S&P 500 is trading 13 percent below its average valuation since the 1950s.”
  5. World central banks expanded their balance sheets by about 9 trillion dollars since the financial crisis started.<

Sources: Bloomberg; Barron’s

Number 5 above is an important point to keep in mind. Easy money has greased the world economy and now there’s talk of even more monetary stimulus in Europe and the U.S., according to MarketWatch. What remains unanswered is, how much of the market’s rise has been stimulated by the stimulus and what happens when the stimulus is no longer available or effective? Can the economy stand on its own?

Barron’s framed it this way, “At some level, the market gets priced not simply for the monetary-easing cure to remedy economic ills, but for that drug being administered to a healthy patient for recreational purposes.” Translation – if central banks overshoot and markets get addicted to the easy money high, the inevitable withdrawal of the money drug may be painful.

 

Data as of 9/7/12

1-Week

Y-T-D

1-Year

3-Year

5-Year

10-Year

Standard & Poor’s 500 (Domestic Stocks)

2.2%

14.3%

20.0%

11.9%

-0.2%

4.8%

DJ Global ex US (Foreign Stocks)

2.7

6.9

1.0

2.0

-5.3

6.7

10-year Treasury Note (Yield Only)

1.7

N/A

2.0

3.5

4.4

4.1

Gold (per ounce)

4.8

9.8

-4.5

20.3

19.8

18.3

DJ-UBS Commodity Index

0.8

4.7

-9.3

5.5

-2.5

3.3

DJ Equity All REIT TR Index

1.6

19.3

23.1

25.9

4.3

11.4

CAN GOOD NEWS BE GOOD FOR THE WRONG REASON? Last week, the government released the eagerly awaited monthly payroll report. It showed a modest 96,000 increase in non-farm jobs in August compared to the month before. While that number was disappointingly low, the unemployment rate showed a surprising (and positive) drop to 8.1 percent; down from 8.3 percent the previous month.

Here’s where it gets tricky: the drop in the unemployment rate occurred for the wrong reason, according to The Economist. The main reason why the unemployment rate dropped was 368,000 people left the labor force. With fewer people being counted in the labor force, the unemployment rate looks better than it might be otherwise.

A related statistic, called the labor force participation rate, measures the share of the working-age population either working or looking for work. This figure fell to 63.5 percent last month – a three-decade low, according to The Economist.

Is a declining labor force participation rate a bad thing? According to Matthew O’Brien writing in the Atlantic, “Less people in the labor force means, all else equal, that we will produce less stuff in the long run. And, less stuff means we have less wealth, lower stock prices, and fewer taxes to pay for retirement.”

So, why are people leaving the labor force? Here are a few reasons:

  • Going back to school
  • Raising children
  • Retiring
  • Going on disability

Source: The Wall Street Journal

Now, there’s one more big reason why people leave the labor force – they get discouraged and simply stop looking for a job even though they want one. Conveniently, the government tells us there are, unfortunately, nearly 7 million of those folks as of the end of August; that’s up from about 4.4 million near the end of 2007.

Fed Chairman Ben Bernanke recently called the unemployment level a “grave concern” and the numbers seem to support him. Bottom line, even though the unemployment rate dropped, it dropped for the wrong reason and we still have a long way to go to get this country working again.

Weekly Fun – Think About It…

“Laziness may appear attractive, but work gives satisfaction.” —Anne Frank, The Diary of a Young Girl