An editorial opinion
by Derek Vogler, CFA®
Vice President - Investments
November 14, 2013
Throughout the year, the U.S. government releases batches of economic data, giving armies of economists and market strategists information on which they can base their forecasts and upcoming market guidance. Sometimes these releases fall on deaf ears. Recently, they have been closely watched and traders place their bets as soon as the data comes out. These reports, perhaps more than ever, are thought to provide insight as to what action the Federal Reserve will take regarding the Quantitative Easing (QE) program. When the September employment report came out weaker than expected, investors cheered because they assumed this would mean a continuation of QE for at least another few months. October’s employment report came in much stronger than expected. Interestingly, investors cheered again, this time because the economy was improving at a faster pace than previously thought so the Federal Reserve could begin to wind down the QE program more quickly. No, you don’t have to re-read the above two sentences. In both cases the stock market rallied, first when bad news was good for the market and later when good news was good for the market. Sometimes this is a strange business.
The U.S. non-farm payrolls for October suggest labor markets were beginning to heal prior to the government shutdown. The reported figures of +204,000 were much higher than the forecasted +125,000. In addition, the prior two months were adjusted up +60,000. While on the surface, these results appear relatively good, the distortion from the government shutdown and the impact on November’s figures are yet to be fully determined. Some of this impact was seen on the unemployment rate that ticked up to 7.3% during the month. As the markets contemplate the Fed’s next move, it’s important to remember that the stated policy is predicated on achieving a long-term unemployment rate below 6.5%. Until that level is reached, they have hinted that actions will be highly accommodative.
Other economic releases continue to paint a mixed picture about the strength of the U.S. economy. In the latest statement by the Federal Reserve, they highlighted consumer and business spending as showing some strength prior to the government shutdown, but they also noted that factory orders and housing have slowed. Overall, the messages conflict and suggest a continued cautious approach from the Fed. The good news is that inflation remains subdued at 1.2%. Since the other stated objective is to achieve a 2.0% inflation rate, the Fed should have plenty of flexibility to either extend the QE program further in the future or keep rates low for longer than originally expected.
The other big news this month was the long-awaited rollout of the Affordable Care Act (aka Obamacare). Initial demand for the new, government-sponsored coverage seemed to exceed expectations, but then problems with the website began to develop. In addition, reports of thousands of individuals being dropped from their existing plans have peppered the airwaves and forced some government officials to issue public apologies. Ultimately, all of these problems could be a big deal for U.S. consumers and businesses as it could re-ignite uncertainty about the law. Business owners and managers alike need to understand the rules or the tendency is to put off hiring decisions for another time. In an environment where significant economic growth remains elusive, this could be another obstacle for the continued recovery. The Department of Health and Human Services has vowed to have the system fixed by the end of November. If this does not happen, politicians will be scrambling to create short-term solutions before year end. This could be an even larger challenge since it would require cooperation in Washington’s politically fractured environment.
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