Weekly Asset Allocation: Don’t Call It A Return!


Confluence Investment Management offers various asset allocation products which are managed using top down or macro analysis. We publish thoughts on asset allocation on a weekly basis in this report, updating the report every Friday, with coaching Podcast.

Last week, enhanced federal unemployment benefits of up to $ 300 per week expired across the country. It has been speculated that the end of these benefits could lead to a wave of new entrants into the labor market. However, data from the Bureau of Labor Statistics (BLS) suggests that this may not be true. In June and July, about half of the country’s states exited the unemployment benefit increase program. Subsequently, states that exited the program experienced a steeper decline in the number of initial claims filed, but experienced a slower increase in the number of workers entering the workforce. It should be noted that two months of data is not a long enough period to draw decisive conclusions about the labor market. That being said, if this trend continues, it could prompt the Federal Reserve to accelerate the withdrawal of monetary stimulus.

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The latest jobs report has led to speculation that the Fed may delay the withdrawal of its monetary stimulus. According to the BLS, the country created 235,000 jobs in August. This is less than a quarter of the jobs created in the previous month. The sharp slowdown in job creation has led many to question the strength of the economic recovery. In anticipation of a possible delay in the withdrawal of monetary stimulus, investors sold Treasuries and bought technology stocks. On report day, NASDAQ closed at an all time high, while the S&P declined slightly.

While the focus on employer payrolls makes sense, it may not be the most important data point when trying to assess the Fed’s next move. St. Louis Fed Chairman James Bullard downplayed the importance of the payroll figures in june, arguing that the labor market may still be tight even though the wage bill has remained below pre-pandemic levels. So far, the data supports this view. The last JOLTS report showed that there are more than two million additional job offers that there are no people looking for work. In recent months, companies have chosen to increase wages in order to attract more workers.

The biggest drag on the workforce has come from workers at the ends of the age bracket. The youngest cohorts, excluding 16-19 year olds, and the oldest were reluctant to return to the labor market. While higher wages may be enough to attract younger workers, attracting older workers could prove more complicated. For these workers, there is no need to rush into the workforce as they can switch to their Social Security retirement benefits once the pandemic benefits expire. If that happens, it could signal the Fed that the job market is too tight. Therefore, the decision to gradually reduce monetary stimulus may depend on the willingness of older workers to re-enter the labor market.

With improved unemployment benefits ending this month, the Fed will likely pay more attention to the workforce. In a recent interview, Bullard argued that payroll data would likely be jerky from time to time, but he expects the country to create 500,000 jobs per month this year. So far, the country has an average of 586,000 jobs per month. He also noted that he expects more people to re-enter the workforce after the expiration of the enhanced benefits. Based on comments he made in June, we suspect that he and perhaps other policymakers might be more concerned about the number of people entering the workforce than the number of jobs created. In the event that workers do not return to the labor market, we would expect there to be increased support for the Fed to step up the pace of its withdrawal from stimulus measures. An early exit from its asset purchase program could give the Fed the opportunity to raise rates more quickly. This result should raise interest rates, improving the outlook for shorter-term fixed income securities.


Past performance is no guarantee of future results. The information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice or a recommendation. The investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial situation. The opinions expressed are current as of the date indicated and are subject to change.

This report was prepared by Confluence Investment Management LLC and reflects the current opinion of the authors. It is based on sources and data believed to be accurate and reliable. The opinions and forward-looking statements expressed are subject to change. This is not a solicitation or offer to buy or sell securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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