It's all about the Fed...or is it?
OK, the news is out! The Fed did NOT raise rates. A new factor emerged today in the Fed's statement...Brexit! Yellen said next Thursday's British vote on whether to leave the European Union was one of the factors that factored into today's decision. She said a vote to secede could have consequences for the (U.S.) economy and financial conditions. "We need to assure ourselves that the underlying momentum in the economy has not diminished. I don't know what the timetable will be to gain that assurance. A July hike is not impossible."
Quite Frankly, listening to Janet Yellen and the Federal Open Market Committee (FOMC) in general has been like watching a a tennis match in a tie breaker in the 5th set! How many times can we go back and forth?
On December 16, 2008, the Fed has announced that it once again lowered its benchmark interest rate target to a range between zero and one quarter of one percent. The move came as a result of the longest recession since World War II, a time when jobs were being lost at an incredible rate. Ten days before that, the jobs report showed that the economy shrank by 533,000 jobs in the previous month, the largest one-month loss since 1974. (later revised to a loss of 765,000 jobs). After many head-fakes and false alarms and exactly seven years later, on Decemeber 16, 2015, the FOMC raised the Fed Funds rate by 0.25%. Unemployment was at 5.0% and inflation was running at 0.7%. Remember the goal of the Fed is "full" employment and inflation at 2.0%.
Last week in the jobs report we heard that the economy only created 38,000 jobs (the smallest since 2010) and not the 155,000 that was expected. Rumor has it that Verizon alone accounted for 35,000 jobs not counted because of their labor strike. The unemployment rate dropped to 4.7% from 5.0% the month before. Hooray! Wait, here is the real news...458,000 people dropped out of the labor force. Coincidentally, that number accounts almost perfectly for the 0.3% drop in unemployment. The most recent inflation data shows we are now at 1.1%.
Confused enough yet? Here is one more tidbit. When I was on a bond desk back at Fidelity, the smartest of the smart always told me that the thing to focus on in the jobs report is AVERAGE HOURLY EARINGS. Guess what? Average hourly wages climbed 0.2% last month to $25.59. Hourly pay rose 2.5% from May 2015 to May 2016, just a hair below the post-recession high.
Why am I telling you all this you may ask. Simply to reiterate the importance of remaining in a diversified portfolio while making some educated tactical shifts but never straying from your long term plan because of a few headlines. It is as impossible to predict the economy as it is to time the market.
In summary and as the boy scout in me would say, "Be Prepared".
