This week, Bradley Johnston, CFP®, ChFC®, MSBA, does a deep dive into two topics dominating the headlines recently: employment and inflation.

Transcript

Welcome to the Weekly Market Update!  It is has been a busy two weeks on the economic front and in the markets since we last spoke.   Today, We will take a close look at Employment and inflation data, which have controlled the majority of recent headlines.

We will kick things off today with the jobs market. Employers added 315,000 jobs in August. The labor market is still strong but shows signs of cooling from a five-month high of 526,000 in July.

The unemployment rate slightly increased from 3.5% to 3.7% as more people looked for jobs.

The share of adults working or seeking employment, commonly known as the labor participation rate, increased as well from 62.1% to 62.4%. This returns us to pre-pandemic levels, but the share of working-age people in the labor force is still surprisingly low.

The labor market is still on fire when comparing roughly 11.2 million open jobs to 5.7 million unemployed. This means there were two open jobs for every unemployed person.

Average hourly wages rose 0.3% in August to $32.36. Wages increased in retail, travel, financial activities, health, data processing, book publishing, and the movie-making businesses. But not so much in the other sectors. Overall, it was the smallest increase in four months. But when you compare the pay over the past year, it increased by 5.2%—it was still one of the fastest increases since the early 1980s.

The labor market remained strong in August, although perhaps less tight than in July. So was this good or bad, you might ask. Economists have spun it both ways, but Chairman Powell had the last word. “This does not change the view that the labor market is ‘clearly out of balance,’ to quote the Fed Chairman.

Because of this, it seems the Fed will continue tightening into year-end. What is less certain is if the Fed can accomplish this goal without tipping the economy into a recession.  This is likely something we will have to continue to keep an eye on for some time.

Let me shift gears to the next big economic story – inflation numbers, which came out this Tuesday.

The consumer price index rose 8.3% in August from the same month a year ago.  It was slightly down from the 8.5% number in July.  Which had decreased from the decades high of 9.1% in June.

Though prices rose more slowly in August than a year ago, they increased from July after excluding volatile food and energy prices.

The core CPI rose 0.6% in August, double the pace of July. It increased 6.3% from a year earlier and was up from the 5.9% rate in June and July.

The Fed closely follows the core CPI as a reflection of underlying inflation considering it a more accurate measure of future inflation trends.

There are some bright spots in the latest inflation data. Gasoline prices declined 10.6%. The national average price of regular gas was $3.71 a gallon on Tuesday, down 26% from the peak in June.

But most goods and services remained much higher than a year ago.

Food prices continued to climb sharply, nearly 11% more expensive than last year.  The price of the eggs and butter in your breakfast this morning have increased almost 40%.

Prices are also going up for medical care, education, electricity, and natural gas.

Housing costs make up nearly one-third of the overall CPI, and also rose 0.7% in August.

The latest data shows that inflation pressures remained solid and stubborn. So what is next? The Fed is primed for another large rate increase next week.

The market has already priced at least a 75 basis point rate hike. A 100-point increase certainly make headlines, but the prospect of sustained increases in the coming months remains.

The market reaction was initially negative but slowly turned positive after digesting the jobs data. Stocks gained 2 to 4% last week. But it was not kind after seeing the latest inflation numbers.

Everything from stocks and bonds to oil and gold fell. Stocks tumbled and recorded the worst day since June 11, 2020. Bond prices fell. The volatility jumped.

The Dow Jones Industrial Average dropped about 3.9% on Tuesday. The S&P 500 fell 4.3%, while the Nasdaq gave up 5.2%. These declines left the Dow down 14% for the year, while the S&P has lost nearly 17%. Nasdaq got the brunt which has retreated 26% for the year.

So, what does it all mean?

Inflation has been the front and the center for families, markets, Fed, and mid-term elections. And it will be for some time. There is no quick or easy solution to the inflation problem.

The average household now spends $460 more each month to buy the same goods and services as last year.

Consequently, the Fed is laser-focused on getting inflation down. So, we expect them to keep increasing interest rates, which could result in the economy cooling off. What we are witnessing is a classic business late-cycle phenomenon.

Investing in stocks has always required riding out the ups and downs. Volatility is an ever-present part of investing.

Though market reactions present short-term pain for investors, it also offers some opportunities. We will continue monitoring the markets and making opportunistic actions benefiting your portfolios.

Have a great weekend, and join us next time for the weekly market update!

Other Previous Videos

  • September 2, 2022

    This week, Bradley Johnston, CFP®, ChFC®, MSBA, discusses the current state of inflation, including the Fed’s latest remarks, the likelihood of another 75 bps jump in interest rates, and the latest on investor sentiment.

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  • August 26, 2022

    This week, Gabe Adams, CFP®, MSPFP, discusses two important recent developments in Washington: passage of the Inflation Reduction Act and the President’s recent announcement on student loan forgiveness.

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  • August 19, 2022

    In this week’s update, our new Chief Investment Officer, Ramesh Poola, Ph.D., CFA®, shares the latest news on inflation and touches on the recently passed Inflation Reduction Act (to be elaborated on next week).

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