The US Economy Appears Okay, so What is Wrong with the Markets?????

The US Economy Appears Okay, so What is Wrong with the Markets?????

After a very poor August, September has started where August left off. This past week, the major US indexes were down a bit more than 3%. Every sector has been negatively impacted. What is going on?

The Yield on the 10 Year US Treasury:

Source of all the above charts: marketwatch.com

What was the economic news this past week?

The formal unemployment rate moved down to 5.1%, which is below the median level of 5.6% since 1948. This is great news! There were 149 million people working and only 8 million actively looking for full time work. But, the participation rate (those actually in the workforce) is at a 38 year low. (Not so good.) http://www.marketwatch.com/story/its-labor-day-heres-the-state-of-the-jobs-market-2015-09-07

Hourly earnings rose by 2.5% y/y per Friday’s report. http://www.businessinsider.com/monday-scouting-report-sept-7-2015-2015-9

The Gallup Job Creation Index came in at 32 for the month of August, consistent with July, and indicating a continuation of the highest level of job creation in the seven year history of this report. 44% of workers indicated their employers were hiring and only 12% indicated they were letting people go. http://www.gallup.com/poll/127541/job-creation-index-weekly.aspx

Those that are desiring work are definitely finding it, now more so than any time since 2010:

Americans are buying new cars at the highest level in the past 10 years! This reflects all of August, including the period after the burst of the Chinese markets on August 11th. We are on pace to sell more than 17 million new cars in the US this year, the highest level since 2001. Great news! http://www.ibtimes.com/august-2015-us-new-auto-sales-americans-shrug-global-market-volatility-buy-cars-2078135

Retail sales, announced last week by select retailers, showed a decline of 0.9% on average for stores open more than a year, versus the 0.6% expected by analysts. Results for individual chains were mixed and FX changes and low gas prices hurt the numbers. Costco saw sales, excluding gas and FX, of +5%, but with gas and FX was down 2%. http://news.investors.com/business/090315-769531-august-retail-sales-soft-for-back-to-school.htm

Inflation or deflation we will not know about for August until the BLS releases CPI data on 9/16.

Though not economic, murder rates are rising in many US cities! We know that when people are fearful they do not go out and that can not be good for the economy. http://www.nytimes.com/2015/09/01/us/murder-rates-rising-sharply-in-many-us-cities.html?_r=0

Chicago Purchasing Managers’ Survey slipped from 54.7 in July to 54.4 in August, indicating that the economy is continuing to grow and bounce back in that region. https://www.ism-chicago.org/insidepages/reportsonbusiness/

Revised 2nd Q non-farm productivity, reported on 9/2, was up 3.3% versus the initial reading of +1.3%. The significant bump was attributed to the lackluster results of Q4 2014 and Q1 2015. Unit labor costs were down 1.4%, as productivity increases significantly outpaced wage increases. Wage increased only 1.7% y/y. http://bloomberg.econoday.com/byshoweventfull.asp?fid=467104&cust=bloomberg-us&year=2015&lid=0&prev=/byweek.asp#top

The ISM Manufacturing Index, released on 9.1, came in at 51.1 versus prior month of 52.7. The 51.1 indicates continued growth, though at a slow pace. The survey identified that backlogs came in at 46.5, indicating the third month of decline in that area.

Gasoline Prices: Gasoline prices are at their lowest level in 11 years and they are expected to continue even lower! CNN estimates that the average driver is saving $50 per month in gas costs, or $600 per year. This has the same economic impact as a tax cut or an interest rate cut. Also, when considering all of the industries that use oil and petroleum products and derivatives in their manufacturing and transportation, this will be a major plus to those segments of the economy…. http://money.cnn.com/2015/09/06/news/economy/gas-prices/

Summary:

The economic data continues to chug along. Not smoothly, not quickly, not effortlessly, but forward in an inconsistent sort of way.

The volatility that we have seen over the past few weeks definitely can scare the economy into a slowdown and we are watching very closely and carefully for indications of that. So far, we have seen or heard of no indications.

The market is definitely spooked by the possibility of the Fed raising the target rate. Whether they do or they do not is truly of little importance, as the increase would be miniscule from near zero rates.

• The current target rate is in the range of 0 -1/4 of 1% as established on 12/16/2008. The effective rate on 1/1/14 was 0.08%. It is now 0.13%. See https://apps.newyorkfed.org/markets/autorates/fed%20funds

Though the initial “choices” for a change in the target rate were either September or December or 2016, the possibility of October has been thrown into the mix, as many think that a hike in September is highly unlikely given the mixed economic news and the terrible global volatility of markets, currencies and commodities. (Theoretically and explicitly, the Fed does not care about stock market volatility. Implicitly, they certainly care about its causes and its effects.)

Uncertainly abounds.“Hell and high water” are very unlikely, but the fact that there are so many moving variables definitely has a non-positive impact on algorithmic and quantitatively based traders. Hold on tight, the worst should be close to over and then we will begin to see the light with earnings and forward guidance. I am confident that patience will be well rewarded.

Try to have a great week!