September Jobs Report Needs an Asterisk

September Jobs Report Needs an Asterisk

Hurricanes Irma and Harvey blew across the labor market, as employers shed 33,000 jobs in September. Yes, it was the first negative reading on payrolls in seven years, but until we have the subsequent few months’ reports, it’s hard to read too much into the results. (As a note, Puerto Rico is NOT included in the BLS report.) The Labor Department said that the storms likely contributed to “a sharp employment decline in food services and drinking places (-105K) and below-trend growth in some other industries.” 

Half Time for the Economy 2017

Half Time for the Economy 2017

The better than expected June jobs report and Federal Reserve Chair Janet Yellen’s upcoming Congressional testimony is a good opportunity to review where the U.S. economy stands at the mid point of 2017. Economic Growth: The broadest measure of economic growth is Gross Domestic Product (GDP). Over the past fifty years or so, the economy has grown by 3 percent annually. In the past decade, that rate has dropped to about 2 percent, with 2015 being the best year (+2.6 percent) and 2009 the worst year (-2.8 percent).

Comey Steals Spotlight from Reg Reform

Comey Steals Spotlight from Reg Reform

While most Americans were glued to former FBI Director James Comey’s testimonybefore Congress last week, two financial regulatory measures dropped below the radar. House lawmakers passed a bill that would gut the Dodd-Frank financial reform legislation of 2010. If passed under its current form, the Financial Choice Act would give the president the power to fire the heads of the Consumer Financial Protection Bureau and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, at any time for any -- or no -- reason. It would also give Congress power over the CFPB's budget, which means that lawmakers could defund the agency entirely. That’s a shame, because in the near six years since the CFPB was established, it has provided over $12 billion in relief for millions of consumers.

Will the Post-Election Stock Rally Last?


Stock indexes staged a broad, post-election rally, as investors pushed aside their concerns about a potential global trade war and a clampdown on immigration, and instead bet that President-elect Trump’s promise of infrastructure spending would propel profits at large industrial companies and his tax cuts would boost the economy. (Irony alert #1: Congressional Republicans have argued that the financial crisis stimulus (the $787B American Recovery and Reinvestment Act) did not work and fought against subsequent infrastructure spending plans as a way to boost economic growth.) While most believe that infrastructure spending would help the economy, the total impact would be largely determined by its size. At one point during the campaign, candidate Trump promised to spend about $550 billion over five years. If there is general agreement on the positive aspects of infrastructure spending, there is little consensus on Trump’s potential tax plan, which in its current form would disproportionately favor wealthier Americans.

According to the Tax Policy Center, by 2025, 51 percent of Trump’s tax reductions would go to the top one percent of earners (those earning more than about $700,000). Yes, the plan would raise the after tax income of middle class Americans by about 1.8 percent, but the top 0.1 percent would see a tax cut of more than 14 percent of after tax income. (Irony alert #2: The Trump tax plan would likely exacerbate income inequality that already exists and could be a surprise to those Trump voters who said that they felt left out of US economic progress.)

Economists caution that there are two other problems with the Trump tax plan: (1) rich people do not tend to spend their tax cuts; rather they redirect the savings into their investment accounts—that’s good for financial markets, but not so hot for the overall economy and (2) the tax cuts would cause a spike in federal debt levels – the plan would increase the federal debt by $5.3 trillion over ten years, according to the nonpartisan Committee for a Responsible Federal Budget. (Irony alert #3: Taken together, the spending and the tax cuts could balloon the national debt to more than 100 percent of GDP within a few years. How will fiscal conservatives make peace with that potential?)

Trump’s spending and tax cuts could help stimulate the economy in the short term, though the combination of those policies could also spur inflation and prompt the Federal Reserve to raise interest rates at a faster pace than currently expected. Under normal monetary policy, a faster rate hike cycle might snuff out a recovery. But some economists are more concerned that under President Trump, there would be a change in the composition of the Federal Reserve Board. (There will be a couple of vacancies next year and Fed Chair Janet Yellen’s term ends in February 2018.) A less disciplined Fed might accept more inflation, leading to higher long-term interest rates and a weak US dollar. A glimpse of how these policies could impact the bond was seen last week: more than $1 trillion was wiped off the value of bonds around the world.

Another area that could see big changes under President Trump is regulation. In addition to easing up on environmental rules, most expect to see a watering down of the Dodd Frank Wall Street reform, which had attempted to reign in the excesses, which contributed to the financial crisis. (Irony Alert #4: A populist President, put in office by an electorate that hates banks, would make life easier for the financial services industry. Financial sector stocks increased by 11 percent last week.)

Under Trump, the Consumer Financial Protection Bureau (CFPB), which was created out of the Dodd-Frank Act, will likely get diluted. In October, a federal appeals court ruled that the CFPB was “unconstitutionally structured” and as a result, the agency should be treated like others, where the president can supervise, direct and change the director at any time. Current CFPB chief Richard Cordray is unlikely to keep his job.

And finally, the big investment firms, which fought tooth and nail NOT to put clients’ interests first, are ready to resurrect their battle to water down the consumer-friendly Department of Labor Fiduciary Rule set to go into effect in April 2017.


  • DJIA: 18,847, up 5.4% on week, up 8.2% YTD (best week of 2016, biggest weekly gain since Dec 2011)
  • S&P 500: 2164, up 3.8% on week, up 5.9% YTD
  • NASDAQ: 5237, up 2.8% on week, up 4.6% YTD
  • Russell 2000: 1282, up 10.2% on week, up 12.9% YTD
  • 10-Year Treasury yield: 2.12% (from 1.77% week ago)
  • British Pound/USD: 1.2593 (from 1.2518 week ago)
  • December Crude: $43.41, down 1.5% on week, 3rd consecutive weekly loss
  • December Gold: $1,224.30, down 6.2% on week, lowest close since early June and worst weekly loss since June 2013
  • AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.20 a year ago)


Mon 11/14:

Tues 11/15:

Home Depot

8:30 Retail Sales

8:30 Empire State Manufacturing

8:30 Import/Export Prices

Weds 11/16:

Cisco, Lowe’s, Target

8:30 PPI

9:15 Industrial Production

10:00 Housing Market Index

Thursday 11/17:

Wal-Mart, Staples

8:30 CPI

8:30 Housing Starts

8:30 Philly Fed Business Outlook

10:00 E-Commerce Retail Sales

Friday 11/18

10:00 Leading Indicators

Election Surprises and Stock Markets


Last week (What Would Spook Markets?), I focused on recent research conducted by economists Eric Zitzewitz and Justin Wolfers, which concluded that a Trump victory would “reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” There may be some proof to this thesis: As Trump’s numbers have improved, stocks have responded in kind by dropping: the S&P 500 has dropped for nine consecutive sessions, for a total of a 3.1 percent slide. The numbers still favor Clinton, but this has been a strange year, so it is worth looking back to other presidential shockers. 68 years ago, Republican Thomas Dewey was thought to be the favorite and according to analysts at Capital Economics, “the polls caused the stock market to rally in the weeks leading up to the election. However, the shock re-election of incumbent President Harry Truman caused the S&P 500 to fall by more than 10 percent over the next two weeks.”

Finally, given Trump’s vow to fight the results, if the race is close, it is instructive to consider how a contested election result might play out for investors. In 2000, when the country had to wait for the Supreme Court to weigh in on a recount, there was a clear negative market reaction: stocks dropped by almost 5 percent during the week after the election and remained volatile during the 36-day period after polling day.

October Jobs Report:The labor market recovery continued in October, as the economy created 161,000 jobs and the unemployment rate edged down to 4.9 percent, mostly in line with expectations. Beyond the headlines, there were three positive data points in the report: the August and September results were revised higher, bringing the average monthly gain for 2016 to 181,000 jobs; average hourly earnings rose, pushing up the annual increase by 2.8 percent, the fastest monthly growth since June 2009 and an especially impressive number, considering that inflation is running at about 2 percent; and the broader measure of unemployment, which includes those who have stopped looking for jobs and those working part-time for economic reasons fell to 9.5 percent, the lowest level since April 2008. (Note: Although a lot of Americans are working part time, almost all of the 11 million jobs added since the recession officially ended in mid-2009 have been full-time positions.)

At the Federal Reserve policy meeting last week, the central bankers noted that “the case for an increase in the federal funds rate has continued to strengthen, but decided, for the time being, to wait for some further evidence of continued progress toward its objectives.” Consider the October jobs report as further evidence that will help bolster the Fed’s case for a quarter-point interest rate increase at the December 13-14 meeting. Traders are betting on it…according to the futures markets, there’s a 75 percent chance of that outcome.


  • DJIA: 17,188 down 1.5% on week, up 2.7% YTD
  • S&P 500: 2085, down 1.9% on week, up 2% YTD (9 consecutive losing sessions, longest losing streak since Dec 1980)
  • NASDAQ: 5046, down 2.8% on week, up 0.8% YTD
  • Russell 2000: 1163, down 2% on week, up 2.4% YTD
  • 10-Year Treasury yield: 1.77% (from 1.85% week ago)
  • British Pound/USD: 1.2518 (from 1.2186 week ago)
  • December Crude: $44.17, down 9.5% on week
  • December Gold: $1,306.90, up 2.2% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.21 a year ago)


Mon 11/7:

3:00 Consumer Credit

Tues 11/8: Election Day

CVS, News Corp

6:00 NFIB small-business optimism index

10:00 Job Openings and Labor Market Turnover (JOLTS)

Weds 11/9:

Viacom, Wendy’s

Thursday 11/10:

Kohl’s, Macy’s, Walt Disney

Friday 11/11: Veterans Day: Bond Markets and Banks CLOSED, Stock markets OPEN

10:00 Consumer Sentiment

Halloween Special: What Would Spook Markets?


With Halloween looming, what might spook markets during the last two months of the year? Let’s start with this week’s Federal Reserve policy meeting. Investors believe that there’s about a zero chance that the central bank will increase rates this week, especially given that the two-day confab occurs less than a week before the presidential election. (The futures market implies a 75 percent chance of a December rate hike.) That said, there could be an argument that the stronger than expected 2.9 percent annualized gain in third-quarter GDP growth confirms that the economy has recovered smartly from the little over one percent rate seen in the first half of the year and could easily absorb another quart-point hike. In minutes from the September FOMC meeting, “Members generally agreed that the case for an increase in the policy rate had strengthened” and the advance reading of Q3 GDP only adds to that case. A surprise November rate hike would quell Donald Trump’s rhetoric that the fed does “political things” and that fed officials are “not doing their job” and it would also underscore Chair Janet Yellen’s assertion, “that partisan politics plays no role in our decisions about the appropriate stance of monetary policy”. While a November rate hike is unlikely, its occurrence would be a major-league negative shock to the markets.

Another factor that could spook markets would be a significant downshift in job creation. This week’s employment report is expected to show that the economy added 175,000 new jobs in October, slightly ahead of September’s 156,000. Over the past year, there have been nearly 2.5 million jobs created and the unemployment rate has hovered around 5 percent. The reason the rate has not dropped more significantly is because of a concurrent increase in the labor force over the past 12 months. However, if the employment landscape dims in the final two reports of the year, it is likely to cause stocks to tumble and it would also increase the chatter about a looming recession.

By far, the biggest near term risk to markets is a different outcome to the presidential election than what is expected. In other words, a Trump victory may cause a significant selloff, according to recent research conducted by economists Eric Zitzewitz and Justin Wolfers. In their paper, “What do financial markets think of the 2016 election?” the authors looked at currency, stock, bond and options markets globally, and concluded “Given the magnitude of the price movements, we estimate that market participants believe that a Trump victory would reduce the value of the S&P 500, the UK, and Asian stock markets by 10-15 percent...and would significantly increase expected future stock market volatility.” To put that into perspective, the day after the surprising Brexit vote, the Dow Jones Industrials fell by over 3.4 percent, or 611 points, before recovering ground. A ten percent drop in the Dow based on Friday’s close would mean a plunge of more than 1800 points! That’s about as spooky an outcome as any investor might imagine.

Proof of the thesis was seen on Friday afternoon. After news emerged of a renewed FBI investigation into Clinton's e-mails, US stocks dropped, the Mexican peso tumbled and the safe haven of gold gained ground.


  • DJIA: 18,161, up 0.09% on week, up 4.2% YTD
  • S&P 500: 2126, down 0.7% on week, up 4% YTD
  • NASDAQ: 5190, down 1.3% on week, up 5% YTD
  • Russell 2000: 1187, down 2.5% on week, up 4.6% YTD
  • 10-Year Treasury yield: 1.85% (from 1.74% week ago)
  • British Pound/USD: 1.2186 (from 1.2227 week ago)
  • December Crude: $48.66, down 4.2% on week, first loss in six weeks
  • December Gold: $1,282.10, up 0.7% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.22 (from $2.22 wk ago, $2.19 a year ago)


Mon 10/31:

8:30 Personal Income and Outlays

9:45 Chicago PMI

10:30 Dallas Fed Mfg Survey

Tues 11/1:

Coach, Pfizer

Motor Vehicle Sales

FOMC Meeting Begins

9:45 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Weds 11/2:

Clorox, Fitbit, Time Warner, Whole Foods

8:15 ADP Private SecotrEmployment Report

2:00 FOMC Policy Announcement

Thursday 11/3:

CBS, GoPro, Kraft Heinz, Starbucks

8:30 Productivity and Costs

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Friday 11/4:

8:30 October Employment Report

8:30 International Trade

Tired Stock Markets and Fed Fatigue


I'm tiredTired of playing the game Ain’t it a crying shame

-Lili Von Shtupp (Madeline Kahn) in “Blazing Saddles

One thing we can all agree on this political season is that everyone seems tired -- tired of the shouting, the rhetoric and the divisiveness. In some ways, the stock market also feels a bit tired right now, as investors continue to suffer from Fed fatigue. After enduring a correction early in the year, then charging to all-time highs over the summer, the rally seems to have lost some steam lately. Perhaps the slowdown is for good reason, at least from the consumer’s point of view: with the labor market tightening, US companies are paying higher wages, which eats into their profit margins and hurts stock performance. Most Americans would likely happily endure so-so mid-single digit returns from stocks in their retirement plans, in exchange for fatter paychecks.

Conversations about the Federal Reserve also seem a little wearing these days. The Fed’s impact on risk assets, like stocks, seems to wax and wane from week to week, with most now believing that the central bank will raise rates by a quarter of a percent at the mid-December meeting. By that time, investors will know the outcome of the election and will also have a bit more data to confirm that economic growth can withstand a Fed move. This week, the government will release one of the last few important reports before that meeting: third quarter Gross Domestic Product (GDP).

After a dreadful first half of the year, when the economy expanded by just about one percent, growth has accelerated in the second half of this year, as the effects of a stronger dollar and lower oil prices have started to fade. Economists expect that the first estimate of third quarter growth will rebound to an annualized rate of 2.5 percent, due in large part to a surge in exports and specifically soybean exports. Depending on how the Bureau of Economic Analysis handles the spike and then likely reversal in the subsequent quarter could impact the headline. When it’s all smoothed out, we should expect that growth for all of 2016 will be the same, tired 2 percent or so that we have seen over the past few years.

In addition to GDP, which will be revised in a month, the Fed will also chew on the following before the December FOMC: two employment reports (11/6 and 12/4), two Personal Income and Spending reports, which contain the Fed’s favorite measure of inflation, PCE Index (10/31 and 11/30) and one more Consumer Price Index report (11/17). Presuming that these reports are mostly in line with trends, the Fed should hike in December. After that, I'm afraid to tell you that we're likely to endure another round of exhaustive speculation about the pace of rate hikes…in other words, be prepared for the 2017 version of Fed fatigue.

  • DJIA: 18,145, up 0.04% on week, up 4.1% YTD
  • S&P 500: 2141, up 0.4% on week, up 4.8% YTD
  • NASDAQ: 5257, up 0.8% on week, up 5% YTD
  • Russell 2000: 1218, up 0.5% on week, up 7.2% YTD
  • 10-Year Treasury yield: 1.74% (from 1.80% week ago)
  • British Pound/USD: 1.2227 (from 1.2188 week ago)
  • November Crude: $50.85, up 1% on week
  • December Gold: $1,267.70, up 1% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.23 (from $2.25 wk ago, $2.22 a year ago) Prices have climbed above their year-ago levels for the first time in over two years (7/13/14)


Mon 10/24:


8:30 Chicago Fed National Activity Index

Tues 10/25:

Apple, AT&T, General Motors, Pandora

9:00 FHFA House Price Index

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

Weds 10/26:

Coca-Cola, Groupon, Texas Instruments

10:00 New Home Housing Sales

Thursday 10/27:

Amgen, Deutsche Bank, Ford, Sirius XM

8:30 Durable Goods

10:00 Pending Home Sales

Friday 10/28:

Exxon Mobil, Hershey, MasterCard

8:30 Q3 GDP – 1st Estimate

8:30 Employment Cost Index

10:00 Consumer Sentiment


Economic Growing Pains


While it was no surprise that the Fed took no action at last week’s FOMC meeting, there was something interesting contained in the officials’ economic projections. The central bank lowered its longer run expected growth rate from 2 percent to 1.8 percent. This downward revision started in 2012, when the Fed expected growth to be 2.4 percent, which at the time, seemed a far cry from the average pre-crisis annual growth rate of about 3 percent. 1.8 percent seems pretty rotten, but to judge it more effectively, historic data can help. From 1985-2015, GDP averaged about 2.75 percent, but during the post-technology boom through last year (2001-2015), growth averaged…1.8 percent. This more recent slowdown is at the core of the argument among the economic wonks: The doom and gloomers (think former Treasury Secretary Larry Summers) say that the US economy is plagued by “secular stagnation,” where individuals and companies are not tempted to invest, savings’ pile up and growth slumps. Amid this environment, central banks try to nudge participants to do something with their cash by slashing interest rates and buying bonds, but over time, these policy measures lose their oomph.

The other side, led by former Fed Chair Ben Bernanke, argues that weaker economic growth is due to temporary cyclical and special factors and eventually the economy will revert back to its old ways. For the past year and a half, Bernanke has argued that the US economy is working its way out of this “cyclical stagnation,” proof of which can be seen in the improving labor market, and “the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home.”

Hindsight will determine which side is right, but the bottom line, according to Paul Ashworth at Capital Economics, “is that GDP growth has been disappointing.” The lowered Fed projections are simply an acknowledgement of what we have been experiencing on the ground. This week, the government will release the final estimate of second quarter growth, which is expected to edge up to a still-paltry 1.3 percent from the previous reading of 1.1 percent.

The lowered estimate of growth is good to remember, especially when Republican presidential candidate Donald Trump predicts that his tax cut plan will boost economic growth of 3.5 to 4 percent, more than two times what the Fed believes will occur and well-above the 2.75 percent seen from 1985-2015. Trump cited 4 percent growth last week, after doing so earlier this month. As a point of reference, the US economy has not seen 4 percent growth since the height of the dot-com bubble in 2000.

FAFSA UPDATE: The Free Application for Federal Student Aid form (“FAFSA”) is the gateway to education money and it is now available on October 1, three months earlier than in previous years. Given how expensive it is to attend college, here’s a mind blowing statistic from NerdWallet: High school graduates left $2.7 billion in FREE federal grant money on the table over the last academic year, because they did not complete the form…for more on this topic, check out: College Money for the Taking!


  • DJIA: 18,261, up 0.8% on week, up 4.8% YTD
  • S&P 500: 2164, up 1.2% on week, up 5.9% YTD
  • NASDAQ: 5305, up 1.2% on week, up 6% YTD
  • Russell 2000: 1254, up 2.5% on week, up 10.5% YTD
  • 10-Year Treasury yield: 1.62% (from 1.69% week ago)
  • British Pound/USD: 1.2973
  • November Crude: $44.48, up 2% on week
  • December Gold: $1,341.70, up 2.4% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.21 (from $2.19 wk ago, $2.29 a year ago)


Mon 9/26:

10:00 New Home Sales

10:30 Dallas Fed Survey

Tues 9/27:

9:00 S&P Case-Shiller Home Price Index

10:00 Consumer Confidence

Weds 9/28:

8:30 Durable Goods Orders

Thursday 9/29:

8:30 GDP

9:00 Corporate Profits

10:00 Pending Home Sales Index

Friday 9/30:

8:30 Personal Income and Spending

9:45 Chicago PMI

10:00 Consumer Sentiment

Saturday 10/1

FAFSA Form Available (3 months earlier than in the past)

Federal Reserve: See you in December!


Nothing is certain, but it’s fair to say that it is highly unlikely that the Federal Reserve will raise interest rates when it meets this week. While various Fed officials have tried to keep the prospect of an increase on the table, a so-so August jobs report, weaker than expected retail sales and still soft manufacturing data combined to push the odds of a hike at below 20 percent, according to the futures market. That means the focus will turn to the Fed’s economic projections, which have been off the mark for most of the past year, and the accompanying statement. When Chair Janet Yellen spoke from Jackson, she noted that the case for a second interest rate increase was “strengthening”. That may be true, but it is clearly not strengthening enough to warrant a move now. Most analysts expect that the central bankers will send smoke signals that the December meeting is not just possible, but likely.

Of course, because this is the Fed, there will be nothing like this: “We can’t raise rates yet and certainly will not do anything in November, just days before the election, but clear your schedules for December 14th, because we plan to celebrate the one-year anniversary of the first rate hike in a decade with another quarter point!” At this pace you might earn one percent on your savings account by the time the NEXT Olympics rolls around in 2018! To put into perspective just how slow this rate tightening cycle is, compare it to the most recent campaign in 2004-2006, when the central bank increased the fed funds rate by a quarter-point five times in 2004, eight times in 2005 and then four times in 2006.

Meanwhile now that Americans finally got a raise after eight years of stagnating incomes, maybe they will start spending with a little more gusto. In its 2015 Poverty and Income Report the Census Bureau said median (the point where half of households fall below and half are above) household income rose by 5.2 percent to $56,516. The good news is that the gains were seen in all regions, across all age groups, and for most ethnic and racial groups. BUT (you know there would be a catch!) even with the bounce, inflation adjusted income remains below the $57,423 in 2007, just before the Great Recession began and is still 2.4 percent less than the peak of $57,909, reached in 1999.

On a more positive note, with the gains in income, the split between workers and companies appears to be narrowing. According to Capital Economics, “At its peak in 2001, labor compensation accounted for 57.7 percent of GDP, but it subsequently fell sharply, hitting a 60-year low of 52.5 percent in the first quarter of 2012.” While labor’s share has been falling due to longer-term trends like structural factors such as globalization and the decline in the power of and membership in unions, the drop accelerated due to the weakness of the post-recession labor market. As the labor market has improved, especially over the past few years, labor’s share of income has started to rebound, “rising to 54.3 percent in the second quarter of this year” and those gains correspond to a drop in the corporate profit share.


  • DJIA: 18,123, up 0.2% on week, up 4% YTD
  • S&P 500: 2139, up 0.5% on week, up 4.7% YTD
  • NASDAQ: 5244, up 2.3% on week, up 4.7% YTD
  • Russell 2000: 1224, up 0.5% on week, up 7.8% YTD
  • 10-Year Treasury yield: 1.69% (from 1.68% week ago)
  • British Pound/USD: 1.3002
  • October Crude: $43.03
  • December Gold:  at $1,310.20
  • AAA Nat'l avg. for gallon of reg. gas: $2.19 (from $2.18 wk ago, $2.30 a year ago)


Mon 9/19:

10:00 Housing Market Index

Tues 9/20:

FOMC Meeting Begins

8:30 Housing Starts

Wells Fargo CEO John Stumpf testifies before the Senate Banking Committee about the 2M unauthorized accounts the bank had opened.

Weds 9/21:

2:00 FOMC Meeting Announcement/Economic Forecasts

2:30 Fed Chair Press Conference

Thursday 9/22:

8:30 Chicago Fed National Activity Index

9:00 FHFA House Price Index

10:00 Existing Home Sales

10:00 Leading Indicators

Friday 9/23:

Bleak Anniversaries on Wall Street


Past events, no matter how horrible, can be instructive reminders about where we are today. This week marks the fifteenth anniversary of the 9-11 attacks, which helps me think about the people I knew who perished that frightful day. The anniversary also serves as a gut check about something we know, but don’t like to dwell on: bad things can happen at any time, so we better enjoy what we have today or at least try to make a plan to change what we don’t like. We are also approaching the eighth anniversary of the financial crisis, which brought the U.S. financial system to its knees. From September 15 - 21 2008, four investment banks were gone (Lehman Brothers went broke, Merrill Lynch was purchased at a fire sale by Bank of America and Morgan Stanley and Goldman Sachs were forced to become bank holding companies); global insurance giant AIG was bailed out; the money market fund industry was rocked after the net asset value of shares in the Reserve Primary Money Fund fell below $1 per share; and the Treasury Department introduced the first version of TARP, which granted authority to purchase $700 billion of mortgage-related assets for two years.

Thankfully, those dark days are behind us, but for those still worried about the financial system, Moody’s Analytics notes, “Since the financial crisis, the banks have raised substantial amounts of capital, significantly improved their liquidity, and vastly upgraded their risk management practices…It is also reassuring that regulators appear to be carefully monitoring the financial system, and willing and able to take action to head off problems before they become existential economic threats.”

Both during and after the crisis, the Federal Reserve played an active role in helping to stabilize the financial system. In addition to slashing interest rates, it embarked on three versions of bond buying, which were intended to stimulate economic growth. Some believe that the Fed’s action helped save the U.S. economy, but eight years hence, the reversal of those strategies are causing consternation. Friday’s stock market rout was an excellent case in point.

The cause of the selloff, according to the financial media, was a statement by Boston Fed President Eric Rosengren, who said “a reasonable case can be made” for tightening interest rates to avoid overheating the economy. Additionally, a previously unannounced speech by Fed Governor Lael Brainard on Monday (a day ahead of the Fed’s blackout period on giving public comment before its upcoming meeting) got the rumor mill swirling.

Are these two previously dovish Fed officials getting out in front of the public to signal a potential rate hike at the Fed’s policy Sep 20-21 policy meeting? Never mind that recent manufacturing data has been terrible, job growth slowed in August and core retail sales were weak in July. The likelier scenario for the Friday selloff is a more reasonable one articulated by a hedge fund manager I know: “Both stocks and bonds are relatively expensive right now…any suggestion that two dovish Fed officials’ spurring the selloff seems more like a bug looking for a windshield.”

Federal Governor Daniel Tarullo seems to agree. He told CNBC on Friday he wants to see more evidence of sustained inflation before considering an interest rate increase and currently, “We're not running a hot economy.” However, Tarullo also acknowledged “There's no question...when rates are low for a long time that there are opportunities for frothiness and perhaps over-leverage in particular asset markets.”

In other words, when rates stay so low for so long, investors look past fundamentals, drive prices higher and can become complacent. One sign of that complacency can be seen in the VIX index, which is a measure of the expected swings in the S&P 500 over the next thirty days. Recently, the 30 day annualized volatility (of daily changes) in the S&P 500 fell to its lowest level since 1994.

Friday’s selling may simply be an proof that people periodically remember that the risks they previously accepted, may no longer feel so great, especially considering the age of the bull market. But as the analysts at Capital Economics note, “The fact that volatility was low in the mid-1990s did not preclude equity prices from rising for several years as a bubble inflated.”

MARKETS: Stocks tumbled 2.5 percent on Friday, pushing indexes down on the week.

  • DJIA: 18,085, down 2.2% on week, up 3.8% YTD
  • S&P 500: 2127, down 2.4% on week, up 4.1% YTD
  • NASDAQ: 5125, down 2.4% on week, up 2.4% YTD
  • Russell 2000: 1219, down 1.5% on week, up 7.3% YTD
  • 10-Year Treasury yield: 1.68% (from 1.63% week ago), highest level since June 23, the day of the Brexit vote
  • British Pound/USD: 1.3262
  • October Crude: $45.88
  • December Gold:  at $1,334.50
  • AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.21 wk ago, $2.37 a year ago)


Mon 9/12:

Tues 9/13:

6:00 NFIB Small Business Optimism Index

Weds 9/14:

8:30 Import and Export Prices

Thursday 9/15:

8:30 PPI

8:30 Retail Sales

8:30 Empire State Mfg Survey

8:30 Philadelphia Fed Business Outlook

9:15 Industrial Production

10:00 Business Inventories

Friday 9/16:

8:30 CPI

10:00 Consumer Sentiment