True to form, September remains difficult. There have been no negative surprises, yet interest rates have remained frustratingly sticky, and every slice of our economy is dealing with gasoline prices at new highs. This last week I paid around $6.50 for premium. Still doesn’t make me want to be driving an electric car but didn’t make me happy either! Today, the Federal Reserve is set to release a new statement on monetary policy. This comes across as the important point of this week’s news cluster, but in reality, it is part of something much bigger. There are basically four things on the docket for the week:
- The Federal Reserve decision on interest rates- plus the “verbal” guidance from Fed Chair Powell on the course of rate increases going forward.
- The continuing auto worker (UAW) strike that began at the end of last week. I will go into details of what is being asked for below.
- The US Government shutdown. Since there was no budget agreement, this is the can being kicked down the road.
- Ukrainian President Zelensky here in the US meeting with Biden and the Congress.
Each one independently and collectively brings up the most important point to remember about the markets. The bond and stock markets care far less about good / bad, and far more about what they cannot quantify or measure the outcome of. Basically, the stock market doesn’t like what it can’t quantify. Right now, we are in a subtle balance of raising rates to stifle inflation, yet not too much to throw the US Economy into recession. Here is what we have experienced and what is expected based on economic forecasts for rates:
We don’t think the Fed is likely to provide many surprises this week given that the economic indicators since the last meeting have shown a fair amount of consistency that the rate hikes thus far seem to be working as intended but not too much (i.e. recessionary). As of Friday’s close, the futures market was putting the odds of a rate hike at this week’s meeting at less than 1%. That may be too low, but the Fed has tended to move with these futures market probabilities.
In looking at the inflation measures a little bit more granularly, even though the CPI (Consumer Price Index) last week seemed to be a little stronger than desired, it is still on the decline from its high points last year. Please see the path below broken down by Shelter, ex-Shelter and both combined with the line showing the Fed’s stated desired target.
Probably the most easily recognizable issue that we are dealing with is the price of oil. This then translates into gasoline prices. Since gasoline and shelter costs are the largest components of CPI, I thought a picture of what oil has been doing would be helpful to understand how it has spiked higher in the last few months even though the other components of CPI have really tapered off:
The next point is the UAW strike. Since the auto companies are looking to increase wages by 20%, and the unions are looking for an increase of 40%, the strike may last longer than people currently think. Although I hear that the settlement could come in somewhere in the upper 20’s. Can they both settle a little above or below this point? The workers have been falling behind inflation and that wage growth lags inflation but ultimately it catches up through this type of contract negotiation process. The workers are trying to get this catch up with this new agreement. Hopefully there is a resolution that does not make it prohibitively expensive to produce cars stateside. The important point is that this is an immeasurable unknown. Not a particularly large one, but an unknown all the same. This makes me question how markets have reacted during previous labor squeamishness. Below I found a table showing all labor disputes going back to 1919! I think this is enough data for sure. For the most part, initially the markets stumble a bit, but they then get right back on their feet. The 1945 United Auto Workers Strike seems to be the most similar, and the markets only dipped .2%. The problem with the 1945 strike was that it lasted 112 days. That would be quite frustrating should this repeat itself:
The next point is the US Government shutdown. The timing of this shutdown I find particularly important as both parties are doing everything possible to position their party for a victory in 2024. I expect Powell to mention this shutdown today in his commentary. It is also the meaty type of subject that the media salivates over. I don’t think that this is time well spent and history shows no relationship between federal shutdowns and the performance of the economy. We had two shutdowns in 1995 and 1996 and saw no recession either time. There was another shutdown in 2013, no recession. There was a very brief one in 2018, no recession. The most recent shutdown was the longest, 35 days from December 2018 through January 20-19. You guessed it, no recession.
Here's another way to think about it: In the last forty years, the government has been shut for 91 days. Among those days, the US was in recession for four days and not in recession for 87 (source: Bespoke media). That means the economy was more likely to be growing when the federal government was shut than when it was open! NOTE: that unlike some other budget confrontations in the past, this one does not involve paying the federal debt. For better or worse the debt limit has been suspended until January 2025. This means even if the government is shut all the debt will get paid on time; there will be no possibility of default.
As for the Ukrainian President coming to the US, this is a continuation of his request for financial and military assistance. This again falls along party lines and will provide humanitarian visibility to the Congress and Biden. Zelensky comes to the US to speak at the UN General Assembly and then to travel to Washington for talks with both the Administration and Congress. Leaders Schumer and McConnell have reportedly arranged a bipartisan briefing from the Ukrainian President, a session that will undoubtedly strengthen support for Ukraine’s war against Russia. Since we have been consistently helping their efforts, I would doubt that we would discontinue with him coming here to discuss the current situation. This brings me to the concept of trade. I found a very interesting chart that shows that now Mexico and Canada have surpassed China as trading partners. I believe that this provides ample proof as to the slowdown in China and that it is likely to continue. See below:
I find this very interesting as the cost of manufacturing in Mexico is significantly less than here and with them being our neighbor, this could be quite negative for the bargaining power of the UAW and the adoption of robotics on the factory floor (just ask Tesla). This is also why I believe if one is considering exposure to markets outside the US, Mexico appears particularly interesting. The last picture I would like to leave you with is that of the expectation of market’s performance seasonally going back to 1929. As I have been stating consistently for the last several weeks, September and the beginning of October have tended to be quite difficult for the equity markets, yet once the first 10 days of October have passed, the markets have been able to muster quite attractive performance going into year end. Last week I provided a table, but this week I think a picture showing how the US markets have done and how the entire world has done during the same period proves to be quite interesting. Should be interesting to see if we can follow history!
This is not the final week of the third quarter, but still an important one given all that is happening. Please take a moment and evaluate your contributions to your 401-K plans, IRAs and ROTH IRAs, making sure you are doing all in your power to save for a comfortable retirement. As always, we are here to answer any questions you may have.
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