Market News – Week of November 6, 2017

LABOR MARKET CONTINUES TO BE A BRIGHT SPOT:

According to the U.S. Bureau of Labor Statistics, the U.S. economy added 261,000 jobs in October. The unemployment rate moved down to 4.1%, the lowest in 17 years. In addition, the amount of jobs for September was revised up from a loss of 33,000 jobs to an increase in 18,000. With the revision in the September number, the streak of positive months in the labor market remains intact, and now stands at 85 consecutive months.

OTHER LABOR MARKET DATA:

The U.S. economy has 2.04 million more jobs than it did one year ago. Average hourly earnings in October were 2.4% higher than one year ago. The Labor Force Participation Rate (percentage of working age population in the labor force) decreased to 62.7%. This statistic has been bouncing around in the same range for awhile after a long decline that began around the turn of the century.

A NEW FED CHAIR?:

President Trump nominated Jerome Powell to replace Janet Yellen as Chair of the Federal Reserve. Powell is currently a member of the Fed’s board of governors having been initially nominated by President Obama in 2012 and later re-appointed to a 14-year term set to end in 2028. Powell seems to be a candidate who is quite similar in approach and philosophy to the current Chair, so markets seem to be taking this nomination in stride.

MARKETS KEEP RISING:

The S&P 500 notched its eighth consecutive weekly gain. The NASDAQ, Dow Jones Industrial Average and the S&P 500 all closed at record highs on Friday. Shares of Apple jumped 2.6% on Friday and other global technology shares followed suit. U.S. labor market data supported rising markets (see above). Oil price rises buoyed energy stocks. Overall earnings data from U.S. corporations, many supported by rising global demand for their products due to recovering European and other global economies, is pushing prices higher as well.

WHAT, ME WORRY?:

With stock prices hitting new records (again), should we be worried? When talking to clients, we are happy to discuss potential downsides. One of the key points we always try to make is that no matter what we, or any one else, thinks, be prepared for an unexpected downturn, and be invested accordingly. (Also be prepared for the markets continuing to rise for awhile, and be invested accordingly.) So what could cause a downturn? There are always hypotheticals we can come up with, and the often-cited black swan looms, but I think it is important, even when things look good, to look at the risks and the downsides. One is the U.S. government’s ever-rising deficits.

THE ANNUAL DEFICIT INCREASES:

The U.S. ended its 2017 fiscal year on September 30 with a deficit of $666 billion. We have grown accustomed to these very, very high numbers, so some perspective and comparisons might help. This deficit is $80 billion higher than last year. It is 3.5% of the economy as measured by Gross Domestic Product. Last year, the deficit was 3.2% of GDP, so the deficit has grown as compared to the economy as a whole. Individual income taxes rose by $41 billion to $1.587 trillion. Payroll taxes were also up. Corporate income taxes decreased by $2.5 billion to $297 billion. Spending rose by $129 billion to $3.98 trillion. Of course, Social Security and Medicare spending went up, 2.5% and 1.5% respectively. Interest payments on the debt rose by 6.3% to $457 billion (or about 69% of the current annual deficit).

THE OVERALL DEBT PICTURE IS NOT PRETTY:

• The U.S. national debt now stands at $20.37 trillion.
• The U.S. GDP is $19.35 trillion.
• Private credit card debt in the U.S. is $1.021 trillion.
• Private Student Loan debt in the U.S. is $1.47 trillion.
• Mortgage debt is $14.76 trillion.
• Unfunded liabilities of the U.S. is now at $107.78 trillion.

Interest rates are rising, albeit slowly. Right now, the U.S. is paying in the low 2% range in interest on its debt. With those low interest rates, it cost about $458 billion to service the debt over the last 12 months. What if rates gradually rose to 4%? The amount of debt the U.S. now carries crowds out a lot of economic activity, and thus has a significantly negative effect on the economy. Obviously, the tax bill recently making the news would have an effect on the deficit, if it passed. We don’t want to spend too much time analyzing a bill that may never become law, at least not in its current form. However, if a tax reform law begins to look imminent, we will offer more analysis on what it might do to the economy and the markets, and part of that analysis will focus on the impact on the deficit.

References:

DEFICIT INCREASES: http://money.cnn.com/2017/10/20/news/economy/deficit-2017/index.html
THE OVERALL DEBT PICTURE IS NOT PRETTY: https://www.treasurydirect.gov/govt/rates/pd/avg/2017/2017_09.htm;
LABOR MARKET CONTINUES TO BE A BRIGHT SPOT: http://www.calculatedriskblog.com/2017/11/october-employment-report-261000-jobs.html; http://www.calculatedriskblog.com/2017/11/comment-on-employment-report-hurricane.html
OTHER LABOR MARKET DATA: http://www.calculatedriskblog.com/2017/11/october-employment-report-261000-jobs.html
A NEW FED CHAIR?: https://finance.yahoo.com/news/trump-announces-jerome-powell-next-fed-chair-replacing-janet-yellen-190916792.html