Market Commentary – March 11, 2019

Markets were rattled last week.
The market hates surprises, especially when the surprise comes from a central bank. Last week, the European Central Bank (ECB) unexpectedly reversed course and took a more accommodative stance on monetary policy in an effort to encourage stronger European economic growth. Tom Fairless of Barron’s explained:

“Officials are seeking to shore up an economy that has been rattled by shocks ranging from a slowdown in China to mass protests in France and bottlenecks in Germany’s crucial auto industry. They are threading a careful path between providing sufficient support for the region’s softening economy while avoiding any appearance of panic, which could ricochet through financial markets.”

The Eurozone isn’t the only region feeling the pinch of weaker economic growth. China’s exports were down more than 20 percent in February, reported Investing.com. Analysts had expected a decline of about 5 percent. Concerns about the health of China’s economy have been growing since the publication of ‘A Forensic Examination of China’s National Accounts’ by the Brookings Institute. The authors concluded:

“First, nominal GDP [gross domestic product*] growth after 2008 and particularly after 2013 is lower than suggested by the official statistics. Second, the savings rate has declined by 10 percentage points between 2008 and 2016. The official statistics suggest the savings rate only declined by 3 percentage points between these two years. Third, our statistics suggest that the investment rate has [fallen] by about 3 percent of GDP between 2008 and 2016. Official statistics suggest that the investment rate has increased over this period.”

*Gross domestic product is the monetary measure of the market value of all goods and services produced annually in the country.

As if that weren’t enough, the U.S. jobs report for February reported far fewer jobs had been created than was expected. It will come as little surprise to learn that major U.S. stock indices moved lower last week.

How do you reconcile the beige book and the labor report?
If you have never heard of the Beige Book, it’s a scintillating tale of business and economics published by the Federal Reserve. Okay, maybe it’s not scintillating, but it has some pretty interesting stories.

The March 2019 installation – it’s published eight times a year – includes real world stories about businesses and workers gathered by Federal Reserve Banks across the nation. For instance, the St. Louis Federal Reserve reported their contacts in higher education reported falling enrollment. It seems more potential college and post-graduate students have been choosing to go straight into the workforce.

The Beige Book reported, across the nation, “Labor markets remained tight for all skill levels, including notable worker shortages for positions relating to information technology, manufacturing, trucking, restaurants, and construction. Contacts reported labor shortages were restricting employment growth in some areas.”

Of course, labor is easier to come by in some districts than in others. The Boston Federal Reserve reported contacts in its district have a hard time finding skilled workers in fields like information technology, but retail businesses are having no trouble filling jobs.

Wages have been going up in the Cleveland Federal Reserve’s district. “Bankers raised wages both for low-wage and for high-wage positions, citing competitive labor markets. A couple of construction companies granted large retention-focused merit increases to office staff, but other companies mentioned that they tended to grant raises during busier seasons.”

Hiring was up in the San Francisco Federal Reserve’s territory. “Employment at a large San Francisco software and consulting company grew notably as demand for its services increased. A cattle ranching company in Arizona also increased employment to meet growing demand. In the Mountain West, a regional bank noted that its hiring was limited only by a shortage of qualified labor.”

In light of last week’s incredibly weak jobs report, the Beige Book’s findings seem odd that companies are having trouble hiring enough workers and are raising wages to attract them. How can so few jobs have been created when there is high demand for labor? (Economists’ rule of thumb is 100,000 jobs are needed to accommodate people entering the labor force each month, according to MarketWatch.)

An economist cited by MarketWatch commented, “One poor report should not set off alarm bells, but given that the labor market is the linchpin for the entire economy, it does add to existing concerns and raises the stakes for next month’s report.”

Weekly Focus – Think About It
“Hard work spotlights the character of people: some turn up their sleeves, some turn up their noses, and some don’t turn up at all.”
–Sam Ewing, Professional baseball player

Best regards,

John F. Reutemann, Jr., CLU, CFP®

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Investment advice offered through Research Financial Strategies, a registered investment advisor.

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Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.
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Sources:
https://www.barrons.com/articles/european-central-bank-stimulus-51551967979 (or go to https://drive.google.com/file/d/1jDwICeYbsalcb3ZVb5CKf7mVjlvC-N97/view?usp=sharing)
https://www.investing.com/news/economic-indicators/china-exports-tumble-in-february-1801611
https://www.brookings.edu/wp-content/uploads/2019/03/BPEA-2019-Forensic-Analysis-China.pdf (Page 25)
https://www.marketwatch.com/story/us-stock-futures-drop-as-gloomy-china-trade-report-adds-to-global-growth-fears-2019-03-08
https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm
https://www.federalreserve.gov/monetarypolicy/beigebook201903.htm
https://www.marketwatch.com/story/us-adds-meager-20000-jobs-in-february-to-mark-smallest-increase-in-17-months-2019-03-08
https://www.brainyquote.com/quotes/sam_ewing_104937