The momentum of July’s strong market fizzled. August was essentially a flat to negative month as the S&P 500 and Barclays Aggregate Bond were both down fractionally last month.1 There were 151,000 more jobs created in August with the unemployment rate holding at 4.9%.2 This was weaker than expected and continues to perplex the Fed from having any conviction in raising rates.
If the Fed waits too long to raise rates, inflation may become hard to control. If the Fed raises rates too aggressively, our tender economy could begin shrinking into another recession. Although unemployment is below the Fed’s target, it doesn’t appear that they seem too concerned about the economy and inflation growing out of control. I wouldn’t be surprised if we continue to see the low interest rate environment, as there is more fear of a recession looming overhead.
It is hard to believe that seven years have passed since we experienced the depths of the Great Recession. However, the economy has been slow to grow even with the Fed’s aggressive QE monetary policies. Above are two charts that illustrate how long periods of expansion and recession have lasted. Although our current expansion has lasted 86 months, the amount of economic growth (right) is pretty anemic compared to the norm. Our economy doesn’t follow any set of rules that guarantee it has to expand until it grows 20%, 30%, or 40%. A recession can occur fairly quickly with the right set of circumstances.
In fact, it is very possible we would have already experienced another recession after the financial crisis if the Fed had not been so timid about raising rates. If the economy does eventually hit recession status, I would expect it to be much more subtle than what we saw in 2008. The economy has never fully left the fetal position and investors know this. With fundamentals where they are today, I find it puzzling that some try to characterize the stock market as “all a big bubble”.
With that said, markets are fickle and September is traditionally challenging. Hold on for some interesting, and hopefully rewarding, markets ahead.
1 Thomson Financial
2 Bureau of Labor Statistics, “August 2016 Employment Situation Summary”
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