The Fed stole the show last week. Investors got what they hoped for from Powell’s speech at the central bank’s Jackson Hole retreat — a more dovish Powell paves the way for a September rate cut, which is now mostly expected. With Trump’s pressure on the Fed ramping up, some analysts suspect a “jumbo” cut may be on the offering (0.50%) by the end of the year.
The market’s run to yet another new high, however, is overshadowed by growing concern about the labor market which is sending mixed signals. Job creation has slowed to a crawl and layoffs have begun, yet the unemployment rate has held remarkably steady in the low 4% range.
Though it is very difficult to disentangle, this is likely due to the significant drop in immigration. For the first time in recent memory, the US may see a net negative immigration flow (that is, more people leaving than coming). There are arguments for whether this is good or bad, but in the short term it has shrunk the labor market. Though there are fewer jobs, but there are also fewer people looking for jobs. So, the labor market appears to be in an unusual equilibrium at the moment.
Overall, the fundamental data is still poor, but corporate earnings — especially among retailers, which are a good guage for US consumers — have continued higher. While I still see a recession, it appears my calls have made me early. I recognize that this is just as dangerous as being late, so I suggest, just as I always have, that you balance your upside risks and downside risks based on the goals you are trying to achieve. Investors within 5 years to a goal have less ability to weather downside, while investors with more than 10 years to a goal probably shouldn’t worry too much in the short term about a recession.
Chart of the Week
One benefit to consumers we have seen since 2024 has been a reversal of the damaging trend of price growth outpacing wage growth. The almost 1% faster growth of wages over the past year is helping workers get back ahead, though inflation has remained stubbornly high. We are, unfortunately, still a ways away from the “glory days” of 2018 – 2019 when wages grew about twice as fast as prices — though, it is very unlikely we will see the 2010 – 2020 era again in our lifetime.
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