Are equities facing a “Summer of Discontent?”
After rising 5% since late May, equities can’t seem to get out of their own way. Fed Chair Janet Yellen explained yesterday that while the economy still needs a lot of support from monetary policy, it is improving. There’s still a lot of slack in the labor market, but if the labor market improves faster than expected, they may raise rates more quickly than most folks anticipate.
Unemployment is currently just above 6%, but its fall from 10% four years ago has been driven largely by a decline in the labor force, as retirees, students, and discouraged workers have left the workforce. As a result, wage gains have been muted, restrained by a reserve pool of labor that doesn’t show up in the headline numbers. With all those potential workers out there, it’s hard to imagine inflation taking off.
But the potential for a Fed rate hikes hangs like a sword over the market. A year ago Ben Bernanke indicated the Fed would begin to slow its balance sheet expansion and equities promptly had a “taper tantrum,” falling over 5%. Stocks were stagnant from May to August, before rising over 20% since then. Tapering wasn’t tightening, they concluded.
What to do now? 500 years ago Shakespeare described Richard III as unsatisfied and Machiavellian because his physical deformity left him unsuited for the times. He couldn’t leave well enough alone. His excessive schemes and plots proved his own undoing. Investors need to think strategically, and let the markets work their stern alarms into merry meetings.
Douglas R. Tengdin, CFA
Chief Investment Officer
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