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The Wall Street extrapolators had a huge miss this week.

The April “jobs report” showed an increase of +266,000 new jobs. This was far below the expectation of one million new jobs. Oops.

The first Friday of each month is “Jobs Day.” This is the day when the Department of Labor releases the unemployment report for the previous month. As we have noted, the report is technically “mid-month to mid-month.”

In this specific May 7, 2021 report, the unemployment report received measured the net job losses and job gains recorded between mid-March to mid-April, 2021.

Leading into the Friday release at 8:30 am, expectations were for one million new jobs added during the period. After all, a similar number (+916,000 new jobs) was reported one month ago in early April.

The Wall Street extrapolators weren’t even close this time around.

And to make matters worse, the +916,000 jobs created in March was revised down to +770,000 upon further review.

In general, Wall Street loves to extrapolate “one game winning streaks” into “this is exactly how the future is going to be.”

The significant gain in jobs in the March report led to “uncontained glee” in anticipation of how wonderful the April report would turn out. The thinking goes, “if many of the jobs lost last year were now returning, that would lead to wage pressure, which would spur higher inflation.”

Commodities raced ahead in the past few weeks, currencies (listed and unlisted) also pushed higher. This action properly fits with the narrative “the Fed is always behind the curve” and the corollary, “the Fed is often wrong.”

For several months, many on Wall Street have believed that rates must rise sooner than the Federal Reserve has been forecasting. There is some unwritten pressure in the industry to be first, and pressure to be early when it comes to market predictions.

But predictions are often wrong. And since “Wall Street extrapolators” take one data point as “THE new trend” they can often be wrong.

Wall Street extrapolators believe we “must” have inflation.

We’ve been repeating for a long time the Federal Reserve has done an excellent job of communicating with Wall Street and investors. In the past, the Fed was cloaked in secrecy and used circuitous language to remain vague instead of telegraphing their next moves.

Since Alan Greenspan, each successive Fed Chairperson has become more and more clear and straightforward in their communications.

Ben Bernanke was an excellent communicator and had more interviews and question-and-answer opportunities than any Fed chir previously. Janet Yellen (now Treasury Secretary) only improved on Bernanke’s skills. As leaders of the Federal Reserve, Jerome Powell has been the absolute best communicator of all.

Powell and the most recent chairs have been “giving us the answers to the test,” if we would only listen to them. It’s when Wall Street tries too hard to misinterpret the statements when trouble begins.

Powell and other Fed governors have stated many times the “recovery” from the pandemic shutdown will be bumpy and will take time. Results (like new job creation) will take time, one month does not make a trend. At the present time, we are seeing commodities spike higher, because “Wall Street extrapolators” believe we “must” have inflation.

The Fed has not ignored this, and have clearly stated any increase in inflation will be transitory and not permanent. And when asked, the response has been “the Federal Reserve has tools at their disposal to deal with higher inflation if it is not temporary.”

Why does Wall Street seem to have “trust issues” with the Federal Reserve? As we mentioned on the podcast this week, the Fed has done a good job despite the naysayers, and “hasn’t steered us wrong.”

What has the markets rattled this time?   So far in 2021, we have seen bond yields moving higher.

At one point last year (in April 2020), the yield on the 10 year Treasury was 0.57%.
At the time of this writing (March 2021) the yield is now 1.55%.  When interest rates rise, bond values fall.

But here’s an interesting point which many seem to overlook:
The yield on the same investment in January 2020 was 1.82%.
In February 2020 the yield on the ten-year Treasury was 1.55%.

Then we had the “fifteen days to flatten the curve” which has lasted 349 days (so far).

And here we are, back at 1.55% on a ten-year yield. Right where we stood, thirteen months later.
So why would a “round trip” in rates have markets rattled now?  As mentioned in the previous post a few weeks ago, we continue to live in interesting times.

What has changed to get markets rattled?

A lot of folks want to focus on the changes in Washington, a new administration, changes in control in Congress, etc.   And while that may have some impact, it is likely less than most people fear.

The far bigger story is with the Federal Reserve and interest rates. We’ve spent weeks and months trying to get folks to focus on what the Fed is doing, rather than see them base their sleepless nights (and investment decisions) on the number of seats the blue team or the red team holds in the Senate.

Don’t lose sight of the bigger story: the Fed.

Unlike at the end of 2019 and into the start of 2020, the Federal Reserve has been extremely accommodative, bringing massive liquidity into the financial system. In my opinion, Chairman Powell and the Federal Reserve acted appropriately last spring. They moved quickly and they moved decisively.

And the Fed moved with a size we have never seen before.

It’s this last point I believe a lot of people have seemed to have overlooked. The size of the Fed moves last spring will drive our economy and the markets for years.

Yes, years.

In the wake of the financial markets meltdown after 2008, the Federal Reserve brought rates to zero and began several rounds of quantitative easing. What the Fed unleashed last spring are multiples more than what markets absorbed in 2008.

A massive injection of liquidity into the system could, by textbook definition, bring inflation.  This worries some market participants.  And economics professors.  But the Federal Reserve leaders, including Chairman jay Powell, and even previous chair Janet Yellen (now Secretary of the Treasury), have done splendid work landing the jet on the tarmac.

The Fed has stated on several occasions they will wait for the economy to reach nearly full employment before raising rates.  This has some market “experts” concerned because it could take quite a long time to recover the jobs lost in the shutdown.

The economy was beginning to reach this “full employment” range (an unemployment rate somewhere below four percent). Today, there are still 10-12 million still out of work in early 2021. The U-6 unemployment rate stands at more than 11%.

On Friday March 5, 2021 the February employment report showed a healthy increase of 379,000 jobs added. The economy is only just getting re-started.

But this makes some bond market participants uncomfortable. Their textbooks/playbooks tell them that increasing jobs, increasing earnings, accelerated growth will bring inflation. And inflation is terrible for bond investments.

However, the Fed is NOT uncomfortable. Powell and the Fed governors have been steadfast in their message that while we MAY see a rise in inflation at some point, it will be a temporary short term rise in inflation.  But a temporary rise in inflation is very different from “sustained inflation” like we witnessed in the late 1960’s until the early 1980’s. We discussed this in a recent video.

As bond traders expect rates to rise (rates have been rising quickly), the recent popular trade over the last few weeks has been to short Treasuries. This means selling treasuries, and as they fall in value, buying them back at lower prices.

This volatility in bond yields spills over to the stock market. Part of that stems from short-covering trades on the bond portfolios. The money to cover the short positions needs to come from somewhere.

These gyrations in the bond market also lead to stock market reallocations as well. In periods of low (or falling) rates, growth-oriented areas – like technology – do extremely well. We saw this in 2020. However, as rates rise, these heavy-growth-related stories become less attractive.

We then see money “rotate” into other sectors of the markets. This is precisely what has been happening these past few weeks.

Does it mean technology is suddenly a bad investment? No.

As Powell and the Fed continue to maintain their stance regarding inflation and interest rates, bond market participants are essentially “voting” whether they feel the Federal Reserve will be right or wrong. Will the Fed be “behind the curve?”  This is the type of thing that gets markets rattled.

In this case, “behind the curve” implies allowing the economy to grow unrestrained and permit “too much inflation” to re-enter the equation.

The inflation rate for the past ten years has hovered between 1% and 2%. For several years, the Fed has targeted “in excess of two percent inflation” as the moving target point where they will begin to tighten or restrain the economy with rate hikes.

We have to take the Fed at their word.

Are you curious why I have the image of “Marcie Dahlgren-Frost” (played by the excellent actress Laurie Metcalf) from the movie “Uncle Buck” in this post?

Admittedly, it’s hard to find an image that successfully translates into “markets rattled.”  But a phone caller this week asked, “well, what flew up the market’s nose THIS week?” which is a swipe from one of Marcie’s lines from Uncle Buck “well, what flew up HER nose?”   

I am writing this on Friday February 19, 2021.
The Dow Jones is bouncing around 31,600. The S&P 500 is currently 3,928.
I mention these details to highlight where we stood on this date, one year ago today.

The Dow Jones closed at 29,409 and the S&P500 closed at 3,393 on February 19, 2020.

And for a long period of time throughout 2020, it appeared the markets had reached its’ high mark for the year on February 19th, 2020.   If you were Rip Van Winkle, and woke up one year later (today), you would see some generous returns for the past twelve months. Right?

But what did we endure to get from there, to here?
We do live in interesting times. Or, as the John Lennon song goes, “Strange days indeed. Most peculiar, mama!”

Thinking about living in interesting times.

Thinking about what the market has done in the past year has forced me to ponder.   What a fantastic opportunity we all had last spring.   We had a great window of time to invest at bargain prices last spring.  But it was all so terrifying!

And for many, the stock market was a side-show, a distraction.  So many were facing a health crisis in their families, or being let go from a job, or dealing with a incredibly swift and deep recession.

So the stock market gyrations were not “front and center” for many.  That is, unless you live and breathe it like we do at Mullooly Asset Management.  We get an “inside view” at how the human psyche works.  Especially at market extremes.  For example, I cringe a bit when folks say, “Well, I want to get this money invested. But, you know Tom, I want to wait. That’s because the market seems really high right now. Don’t you think so?”

I know it’s impolite to answer a question with another question. But upon hearing this, I feel compelled to often ask, “how do you even KNOW the market is high?”

The only way to know with certainty is by looking back over time.

Let me clarify. To traders, the market is almost always high.
But for longer term investors, is it high at all?
Again, the only way to know with certainty is by looking back over time.

If you consider yourself a long term investor (and you should), try this on for size. When I began as a broker, the S&P 500 was at 210. Today it is approaching 4000. That spans the period from early 1986 through now.

Has it been a steady ride? No.
Has it been straight up? No.
Has it been easy to stay invested? No.
Have I felt foolish adding money when some investments were down? Hell yes.
Have there been gut-wrenching times when I wanted to do something else with that money? Ohhh, yes.

We flirted with that “high water mark” of February 19 again, around Labor Day. Close, but not quite.  The markets did not set another new high until early November.  A very long period of time, it seemed.

And, as many know, “Dow 29,000” in February became “Dow 18,213” in March, just a few short weeks later.   I will be happy to remind people I believed – in April, 2020 – that getting back to 29,000 would be an extremely good accomplishment.

And let this message serve as a reminder.  Markets are volatile, whether we are in “interesting times” or not.  We need to remain aware markets do not move straight up, nor do they move straight down.  We may give back some of the gains we have recently seen, and that will be OK.   I do not believe in magic, voo-doo, or even karma.

And we do not make decisions based on feelings!

At the present time, some will say markets are getting back on track.  Others will say we have “flipped a coin and gotten heads eight times in a row, we’re due for something.”

This is what makes a market, not just for interesting times, but for all times.

I recently posted an image that encapsulates this concept very well!

Can we stand one more post about politics and investing?

In a 2017 interview with CNBC’s “Squawk Box,” Buffett said he has watched politics for “all my life.” And during his adult life, half the time he has had “a president other than the one I voted for.”

“But that has never taken me out of stocks.”

“The American economy – and we’re up to number 45 – we’ve done awfully well. If you mix your politics with your investment decisions, you’re making a big mistake,” Buffett said.

“I have seen people make economic decisions based on their politics and that is not the way to do it.”

Now if you are curious why Buffett says this, read how a 90-year old insists on planning with a 20 year time horizon.

When I was a young guy, working in the financial planning department at EF Hutton in 1984, I was tabbed to work up a report for the planners in the department based on the projected tax increases for the possible “Mondale Administration.” This was because, in accepting his party nomination, Mondale announced he would raise people’s taxes.

I have learned over time, that remaining flexible in our investment approach matters greatly. We need to remain firm in our goals, but flexible in our approach. We need to be prepared for possible changes when there is a new administration.

Will tax tables change? They often do.
Will entitlements change? They often do.
Will interest rates and policies change? They often do.
Do candidates over-promise and under-deliver? They often do.

But rip up the script for your investments and start over? No.

Think about the promises we hear during campaigns. All the same politics. Additionally, every year the president gives a “State of the Union” speech. Have these speeches ever amounted to more than a wish list?  Aren’t political campaigns more of the same?

Politics and Getting Out of Stocks

The idea of going all-in versus all-out of the stock market should seem ludicrous to most readers.  Yet we had a handful of clients who contacted us between July 2020 and last week, asking us to “please take us out” of the market entirely.

We do our best to talk these folks off the ledge. But if they persist, we explain that we will honor their request. And we clearly express our opinion they are making a mistake.

And then we politely explain we will be ending our working relationship at that point.

At every single conversation where this happened (and it did happen more times than I preferred), the next thing I’d hear would be “Why?” I explain they are making a fatal decision with their money, but it IS their money. I also explain they had hired us to manage this money for them. And that, as fiduciaries, we have an obligation to do what is right with the funds entrusted to our care.

In some cases, I went as far as to share an analogy. I would describe they have hired us to drive their car to a destination. We’re driving, they are in the car with us. At one point, we are navigating around the side of a very high mountain.  There is no shoulder.  There are no guardrails.  It’s nighttime.

And it’s snowing.

I explain, that it’s at this precise moment, you lean over and grab the steering wheel from our hands.

How do you think that will end up?

We also hear from folks who really prefer to “sit this election season out!” Remember, I’ve now been in business through ten presidential elections cycles. Folks who opt to “sit this one out”: sometimes get back in, usually lose money or “miss out on gains.”  And sometimes they never get back in.  We are STILL meeting folks who never got completely back into the market – after 2008!

My friend Fred reminded me the other day of a favorite Mullooly-ism: “Markets hate uncertainty. Once the market knows the news, we can all move ahead, again.”

See, the market does not care about your politics, or anyone else’s politics. Once we get beyond an event, it’s onto the “next disaster ahead of us.” And there will be plenty more disasters coming down the pike.  Please don’t let headlines, the news, or your emotions, drive your decisions about investing.

Mixing politics with your investments is an unforced error, a careless mistake.

 

Watch the Buffett interview from 2017, here.