Job’s Friday Update – September Jobs report is 30% weaker than the average for 2015

For wonky asset managers (yours truly) the first Friday of the month is "Jobs Friday". The anticipation for this morning’s report was huge since this is the most meaningful statistic (after Personal Consumption Expenditures - PCE) that Janet Yellen and the Fed will get before they reconsider their interest rate stance. If Yellen follows the bond markets lead, she stay on hold for the foreseeable future. 

September Jobs report

No need to meet this month Janet. Instead of 200,000 jobs the report came in at 142,000 new jobs. Worker participation declined to match the 1977 low. The work week shrank and wages were flat. We are tempted to cheer that part-time positions jumped 53,000. This gain unfortunately came at the expense of full-time positions which declined 185,000 in the month.

The household version of the survey which includes self-employed workers and business owner actually showed a 236,000 job DECLINE in September. Harvard economics professor Greg Mankiw has an excellent description of the survey differences here.

The pundits who called for further positive revisions to previous reports are having humble pie for breakfast too. Last months jobs stinker was met by a chorus of cheerleaders who promised that, “August is usually revised higher!” Instead of an upward revision, August job gains were indeed revised-lower. The BLS cut 37,000 more jobs from the initial report of 173,000.

We expect the jobs report in November to get worse after the long list of announced layoffs are fully reflected. Stock futures are responding with red arrows in equities and green arrows on bonds. Please revisit your stock allocation in your 401K accounts. Stay tuned.


The most annoying question in the world is one word

In our wealth management practice we are asked a variety of questions by clients and prospective clients. The one that I loathe the most is, “What 5 stocks I should be buying right now?” It smacks of greed and a contempt for risk. I usually respond to this question with one word. “Why?”

Responding to the “What” questions is easy. How questions might take time to answer but they are pretty straightforward as well. When, where? Those typically require a simple procedural response. “Why” questions create problems. They cut to the heart of our reasoning, rationale and authority. The most effective responses to “why” questions require that a relationship exists between questioner and respondent. Maybe that’s why our kids employ them at such an early age. When my son asks me why he should eat his vegetables, I could appeal to authority and respond with “Because I am your dad and I said so.” That sort of response will likely be met with resistance pretty quickly.

The better response would require a deeper level of connection. “Son, look at this picture of you when you were only 2 months old. You weren’t even able to eat solid food then but you have grown in two years to the point where your body needs more fuel. If you want to keep growing taller and stronger, you should give your body the energy that it needs and vegetables are part of that energy. That’s why your mother and I eat our vegetables too.” This response demonstrates more attention and care than the appeal to authority and will foster a conversation based on mutual trust. 

Here are some “why” questions for you to try on:

Why are you invested in the stock market?

Why do you benchmark your results to the S&P 500 (or whatever benchmark you prefer)?

Why aren’t you maximizing your 401K contribution?

Why is your 401K (or other investment accounts) allocated the way that it is?

Why don’t you have a budget for your household?

Try to avoid rote answers that might pop up from a google search. Dig deeper to understand your motivation and discover any roadblocks to clear out of your financial path. If you struggle with this exercise, consider one last question, “Why don’t you call us for help?


Is This Correction Different?

In this age of instant information, investors have access to more financial news than ever before. With headlines on the Shanghai markets trending on Twitter and client account access on smartphones, how will the reception of that information change the way that markets react? While the velocity of market downturns could be more sudden and end more quickly than in the past, it’s helpful to look to historical corrections as a guide.

Many pundits have made predictions that the current correction in the U.S. markets are different than the ones we’ve seen before. A correction is defined as a drop of more than 10% in an asset class, while a 20% drop in prices signifies a bear market. There have been nine bear markets since 1957 with an average duration of 14 months. The shortest has been 3 months (Black Monday crash of 1987) and the longest was 31 months from 2000 to 2003 when the dot com bubble burst.

Typically with market pullbacks, they are difficult to predict but after the smoke clears, they are quite easy to understand.

The S&P 500 closed at 1867.62 on August 25, 2015, down 12.8% from the highs in May of this year. It’s the first time the markets have entered a correction since 2011. As the markets continue to process Chinese economic data and look for guidance on if/how/when the Fed will act, it’s imperative to understand what this correction will be like. Has a swift drop in prices presented a buying opportunity or is it merely the beginning?

Black Monday (October 19, 1987)

We can look to history as a guide to what might happen. On October 19, 1987, the Dow Jones lost 22.6%, or 508 points in a one day crash. The pain was immediate and swift. The overall market corrected over 33% over a 3 month period.

Tech Bubble/9-11 Terrorist Attack (2000-2003)

When the dot-com bubble burst in 2000, the S&P 500 fell over 49% during a 31 month period. It rallied from the lows on two separate occasions before finally heading upward in the spring of 2003.

The Great Recession (2008-2009)

When the housing bubble burst, the market dropped 56 % over a 17 month period. Coupled with the Lehman bankruptcy and credit crunch, this correction was all encompassing and severe.

One day, six months or three years or nothing at all? Market corrections can be quick or they can also be a slow burn. As we saw with the market sell off late yesterday, dead cats do bounce. Patience and principle can be rewarded for those investors with discipline and foresight to maintain diversification when markets freak out. A portfolio without a purpose is like a ship without a rudder.

Even though we have access to more information than ever before, markets can still test the resolve of it's participants.

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