Written by: Benjamin Bimson CIMA® / BCJ Financial Group
The last two months of employment numbers have been stronger than expected, and the S&P 500 has hit new all-time highs. The trend didn’t disappoint last week as the Non-farm payrolls jumped by 255,000, which was above the expected consensus forecast of 155,000.1 Underlying wages also grew and the average workweek exceeded expectations by lengthening slightly.
Predicting the Fed’s next moves has also been in full swing this week. Britain’s easing of monetary policy for the first time in 7 years, combined with positive economic data for the US has given quite a bit of fodder to the pundits!
The chart below shows the ebbs and flows of the payroll data on a monthly basis. After the initial drop at the beginning of 2016, the payrolls popped back up to a more normal average for the last 5 years, and staying there is giving the Fed some reason to potentially raise rates later this year in December.
It will likely continue to be a big item the markets are watching each month as 2016 continues to plot out similarly to 2015. If it proves to be more similar to 2012, higher valuations might be supported. If it drops, it is likely to spook the market.
There are numerous pontifications being propagated online these days about what, when, and how the Fed will raise rates… or never raise rates again. Certainly we can draw one conclusion: we are in uncharted territory.
Central banks around the world are continuing to march down the path of the unknown with QE <insert appropriate number here> and asset purchases designed to devalue domestic currency and hopefully goose their relative economies into growth. The issue is that as each central bank does their own version (Japan, ECB, UK…), and countries like the US that want to raise rates would be even more punished on the international trade side if they did. With currency devaluation, doing nothing is like raising rates. Raising rates, in essence, would be even more of a domestic currency drag. The question the Fed has to wrestle with is, how much will other central banks do and when?
It is impossible to say for certain when the Fed will raise rates but with no concrete knowledge of the impact Brexit will have, the presidential elections this fall and other central bank actions, it is likely a domestic rate hike by the Fed won’t happen until December at the earliest. However, things change quickly these days!
One thing is for sure, GDP growth is lower than normal for expansion and the PE ratios for stocks are fairly expensive. The last month’s reading of the PE ratios on the S&P 500 put it solidly in the overvalued side as seen in the chart below. We have a lot of support from the Fed actions and now in-actions. As long as that stays, we very well can keep going at overvalued prices.
The markets sure are sensitive to Fed movements and likely will continue to be so in the coming months. I really don’t like to see markets this dependent, but it is what it is. We know fighting the Fed is a losing battle and that is why we watch it so closely.
Janet Yellen is speaking at an economic conference in Jackson Hole at the end of this month. My guess is that all ears will be listening intently for any hints as to the anticipated stance of the Fed and what they are watching closely.
Few inputs are proving to have as much power over the general trend of the market in the last couple of years as the Fed. Every data point is being evaluated based on how it may or may not influence policy decisions. Every geopolitical event and global macro event – they all are looked at from a standpoint of Fed decisions.
It is quite interesting for sure!
1 U.S. Daily Perspectives. Ned Davis Research Group. August 5, 2016.
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