In recent weeks we’ve talked about how investor expectations around the Fed and interest rates have helped disturb markets this quarter. Just last week the “Magnificent Seven”, large and popular tech stocks including Nvidia and Microsoft, collectively dropped almost a trillion dollars in market value, a record dollar amount for that timeframe. The dollar decline is that high because those companies have grown so much lately and even a relatively benign percentage drop comes off a larger number, but it’s still a noteworthy chunk of money.

Beyond news like that, consternation has been growing for some investors as we get deeper into election year politics and questions about the Fed and potential ulterior motives for its rate decisions get thrown into the mix. The Fed itself, as explained numerous times by none other than its chairperson, Jerome Powell, is an apolitical organization. They have two jobs given to them by Congress – keep inflation manageable and foster a strong labor market. Dabbling in politics isn’t their third responsibility. This has been reiterated countless times over the years but questions still remain.

Does the Fed play politics? Do they raise rates to punish or reduce rates to play favor? Do voting members of the Fed’s rate-setting committee put their collective thumb on the scale for specific candidates, political parties, or their personal agendas?

These are valid questions but, as with the politicization of seemingly everything these days, answers seem open to wide interpretation. For the Fed it’s absolutely a case that anything they do, even doing nothing at all, will be second-guessed and derided by many. So instead of getting overly political, which is something I wholeheartedly try to avoid in these posts, let’s look at some data and analysis on this topic compiled by my research partners at Bespoke Investment Group.

From Bespoke…

In looking at Fed policy actions since 1994 during election and nonelection years, on a net basis, the Fed was more likely than normal in an election year to keep rates on hold, less likely to hike, and more likely to cut rates.

The only election year that the Federal Reserve cut rates in the period from May through November was in October 2008 when the financial system was on the brink of collapse and neither candidate was an incumbent.

It’s hard to imagine any aspect of society as not having a political view these days, especially in Washington DC. If there’s one institution that has mostly managed to stay out of the political fray, though, it’s the Federal Reserve. Individual members have their political biases and some former members even find their way to serve in the administration of the President, but in formal communications and in their official capacities, they tend to stay out of politics.

With 2024 being a Presidential election year, the subject of rate cuts and their timing takes on an added political twist. If the FOMC cuts rates too close to the election, they could be seen as trying to put their hands on the scale in favor of the incumbent while a rate cut right after the election could be seen as rewarding the winner and trying to give them a ‘head start’. Currently, some Democrats have already expressed concern that keeping rates too high for too long has hurt the economy and threatened President Biden’s re-election. Supporters of former President Trump argue instead that by just talking about and telegraphing rate cuts, the Fed is goosing the economy to get President Biden re-elected. Being Fed Chair sounds like fun, doesn’t it?

There are plenty of examples in the past of different administrations either jawboning or blaming the Federal Reserve for certain outcomes. In 1998, former President George H.W, Bush said in an interview that Fed Chair Greenspan’s reluctance to more forcefully lower rates during the recession of 1990-1991 resulted in the weak recovery that cost him re-election. Bush recalled “I reappointed him, and he disappointed me.”

There are always going to be stories and anecdotes to suggest whether the Fed plays politics, but the best way to look at it is through the data itself. Going back to 1994 when the Federal Reserve started announcing its rate decisions in real-time, we compared their actions (at scheduled and unscheduled meetings) in Presidential election years versus non-election years to see if there were any differences or similarities. All else equal, you would expect to see the frequency of rate hikes and cuts be the same in election and nonelection years.

The first chart below compares the frequency that the FOMC has held, hiked, and cut rates during Presidential election and non-election years. In years when there was a Presidential election, the Fed held rates unchanged at 71.2% of its meetings, hiked rates 15.3% of the time, and cut rates 13.6% of the time. While the differences were small, on a net basis, the Fed was more likely than normal to keep rates on hold, less likely to hike, and more likely to cut rates. The Fed may be independent, but historically there has been a slight bias of moving towards easier than tighter policy during an election year.

Looking more specifically, the chart below compares policy actions in May through November in election and non-election years. Here there is an even wider disparity with a bias towards sitting on their hands. At the 22 meetings during these months of Presidential election years since 1994, the Fed stayed on hold just over 80% of the time, hiked rates 16.1%, and only cut rates once (3.2%). Based on these prior actions, as the election gets closer, the Fed looks like it has historically attempted to avoid cutting rates at all costs.

The table below shows the different times that the Fed cut and hiked rates during election years since 1994. Of the eight different rate cuts, only one occurred in the months spanning May through September, and that was a 100- bps cut on 10/29/08 when the financial system was on the brink of collapse. Not only that, but it was also an election where neither candidate was the incumbent, so politics played zero role in that example.

With regards to rate hikes during election years, five of the nine hikes occurred in 2004 when George W. Bush was running for re-election (an election he ultimately won). Besides the hikes leading up to and just after Bush II’s election in 2004, the other three hikes that occurred during election years were when neither candidate for election was an incumbent. Again, outside of that one period in 2004, the Fed appears like it prefers to stay put during election years, and as the pages of the calendar turn, it raises the question, will the rate cuts that keep getting pushed further out on the horizon ever arrive?

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Good morning and Happy Tuesday. We’re less than a week out from Tax Day so here’s a grab bag of things to remember if you’re like me and your completed return has been ready and waiting for signature and mailing longer than I care to admit.

Funding an IRA for last year –

You can fund an IRA up until close of business this coming Monday, the 15^th.

The practical deadline for electronic funding from an outside bank is this Thursday but midday Friday, the 12^th would be the last day since an overnight transfer is required.

If you have to wait until the 15^th to fund your IRA, a good option is to walk a paper check into a Schwab branch (assuming that’s where your account is) and have them deposit it for you. Get a receipt showing the deposit date just in case there’s a question later.

However, Schwab will let you do a mobile deposit up until 4pm local time on the 15^th, so that’s a great option if you can leverage technology.

Technically you can put a check in the mail and have it postmarked by the 15^th and be fine but let that be your last resort. Make the check payable to the custodian and write “2023 IRA Contribution” on the memo line. You could also add in “FBO (your name)” just to make it crystal clear.

Clients often ask about Form 5498. This form shows deposits into an IRA and shows up after tax season. 5498’s are typically sent late-April through mid-May and, consequently, aren’t required to file your tax return. Just keep it for your records or, more likely, let the custodian keep it for you until needed. Also, 5498’s aren’t generated for employer sponsored plans since custodians don’t keep track of deposit timing like they do for IRAs. The assumption is that you and/or your tax person are doing so related to your business tax return.

Paying your taxes –

I think most people mail in paper checks to pay their taxes. This is how I do it and it’s more out of habit than anything, especially since I pay electronically for almost everything else. Your tax person or your tax software should provide a slip with the relevant information to include with your check to the Feds and the State.

That said, you can pay your federal taxes via the IRS’s Electronic Federal Tax Payment Service or DirectPay for free and processing time is about one day.

You can also pay federal taxes via credit or debit card, but fees apply. Here’s an IRS link to see the different vendors and their fees.

https://www.irs.gov/payments/pay-your-taxes-by-debit-or-credit-card

And you can pay via wire transfer. Schwab has an electronic tool for setting up domestic wires and it’s free. Otherwise, banks typically charge around $25 for a wire transfer. Timing on this could be same-day if the wire request is received in good order by maybe 1-2pm EST. Still, I would plan to send a wire by this Friday just to be safe. The IRS has a worksheet with the wire details that you can find on irs.gov. 

Wires are straightforward so long as you slow down a bit and check everything multiple times. I say this because wire instructions are easy to get wrong and the exchange of this information, often via email, makes wires susceptible to fraud. Someone could gain access to your email and insert their own wire instructions without you knowing. It’s primarily for this reason that a bank’s wire department asks if you personally verbally verified the wire instructions prior to submitting the wire. Please don’t ignore or be overly casual about this step. Wires are great for sending money but are almost impossible to get back if something goes haywire.

Along these lines, tax-time is a golden opportunity for fraudsters or even just shady companies looking to take advantage of people. One of the ways they get you is by creating fake, or “spoofed”, websites and emails that look legitimate. However, there are some ways to spot fake or otherwise shady sites.

Look at the URL at the top of your web browser screen. Are there misspellings in the company name or anything else that seems out of place. Does the website look okay but you notice spelling or grammatical errors? If so, don’t click on anything, close your web browser, and start over.

It’s also a good practice not to search for websites via Google. Instead, bookmark your bank’s website, for example, to limit your exposure to potential fakes that bubble up in a web search.

The same basic gist applies to emails. Look at the sender’s address. You may have to hover your curser over it or tap the name if you’re on your phone. Is it spelled correctly? Does it look accurate? If anything looks strange, stop, don’t click anything, and reach out to the sender to ask if the email is legitimate.

Also beware of any website or email pushing you to act quickly. Granted, tax filing comes with deadlines but your personal fraud radar should ping anytime you’re feeling pressured to click a link or provide your personal and account information to a third party.

Remember: When in doubt about this sort of stuff it’s best to slow down or stop entirely. Call your bank to verify using information derived from another source, such as a bank’s customer service number obtained from Google. If it’s from Schwab or from me, call me and ask. By the way, I’m not suggesting that you fear everything, just be more aware, especially during tax-time. These days a little paranoia goes along way.

Have questions? Ask us. We can help.

You may have heard recently that the US is less happy than it used to be. I saw this news about an annual update from Gallup and others last week to their World Happiness Report. I won’t repeat it all here. Instead, I’ll provide some links and notes to scan through and you can read more when you have the time.

First, here’s a link to a brief article on the update. I like this format because Axios presents us with the news item, gives a quick summary and a suggestion of why it matters, followed by some additional detail. It’s a news appetizer and we can consume the rest later if we want to.

The takeaway from this article? We’ve joined Germany in a happiness nosedive from last year’s findings. We’re told this is because younger people reporting feeling unhappy due to distrusting our political system and fearing political violence.

https://www.axios.com/2024/03/20/world-happiness-america-low-list-countries

Really? Wow. I’m 47, I pay attention, and my life certainly isn’t perfect but I do consider myself happy. I think those around me are happy. But after some reflection I can see cracks in my assumption that, at least generally, correspond with the report. Inquiring minds want to know so I dove into the details.

Here’s a link to the report page where you can review a more detailed summary. Then you can download the full report as I did. It’s 158 pages but contains lots of charts and graphs so it’s not too bad.

https://www.gallup.com/analytics/349487/gallup-global-happiness-center.aspx#ite-611948

Here are some of my notes about the report –

Happy people live longer, healthier lives. This seems straightforward, but are we as happy as we think we are? Personal implications notwithstanding, what does it mean for our culture that a growing number of people, mostly younger, report being unhappy?

Researchers used a three-year average of “life evaluations” that show our country falling from 15^th place to 23^rd among all countries in terms of overall happiness. The change was due primarily to those under 30 reporting a large drop-off in happiness.

Apparently there’s a U-shaped curve that often tracks happiness throughout one’s life. You’re happier when you’re very young and that declines through adulthood and into middle-age, and then happiness ramps back up as one gets older. Maybe, but whatever shape it takes there’s a growing divide between levels of happiness reported by the young and old, and that gap is very pronounced here at home.

We’re now in 62^nd place in terms of happiness for those under 30, behind a laundry list of countries I would assume we’d easily beat. I was surprised to learn that Eastern European and even some Middle Eastern countries have happier younger people than we do, even though those economies are much smaller per person and the standard of living (maybe we should redefine that?) is comparatively low.

Flip that age group around and we’re in 10^th place for happiness reported by folks age 60 and older, behind the Nordic countries, Canada, and Australia. Those countries all score higher than we do within their younger population, but the top-ten list for younger people is different.

The notion that younger people generally are happier than older people is now only true in some countries but not here in the US and much of the developed world. This shifted over the last decade or so. Now younger people report being happier in smaller countries like Greece and Portugal. Developed countries like ours are losing ground in the overall happiness ranking because of this. We now rank near the bottom of a list comparing current happiness to results from 10+ years ago. Our rate of change comes close to that of Columbia, Tunisia, and Congo. Canada is down the list with us, but yikes…

And happiness within older populations isn’t necessarily about money. India has the second highest proportion of older people after China but reports high levels of happiness among its older populations. Interestingly, older Indian women report being happier than their male counterparts. Both groups report that their living situation is the largest component of their happiness, but this is also higher for women. The report suggests this could be due to more older Indians “aging in place” with strong family connections that women (typically) have worked hard to maintain. Also interestingly, education and income levels impact happiness but the findings relate generally to the various socioeconomic groups within the country’s caste system.

Researchers also reviewed how enhanced well-being helps ward-off brain diseases that cause dementia by maintaining cognitive abilities over time. They suggested that having a positive environment, personal connections, physical activity, and a sense of purpose naturally support one’s cognitive abilities and can help with early interventions.

Couple these findings about aging in place with strong family connections and the importance of supportive environments in helping to fight dementia and we have a rough model for aging well in the developed world. Researchers made these connections and discussed some ways that certain countries, such as in the Nordic region, are heading in this regard.

Ultimately, reviewing this report was kind of a bummer. There were bright spots, such as I just referenced about the importance of personal connections, but it was tough reading a big-picture analysis of how somber the mood is among our young people, at least on average. I don’t pretend to know why this is the case. It will be interesting to see if this is just a blip that will correct itself in time, or if we’re looking at a new trend.

Either way I think there’s value in this type of information as a check, or perhaps a recommitment, to our own happiness level and doing whatever it takes to maintain it.

Have questions? Ask us. We can help.

Are you getting a little tired of me mentioning how interest rates and the Fed have been influencing the stock and bond markets? Well, I sometimes tire of it because it’s been on the radar for years now and that doesn’t seem to be changing anytime soon. Of course I’m kidding around a bit because I do love this stuff – it just sometimes feels like a feedback loop.

What does change, however, are the assumptions made by investors about the path of rates. Are they headed higher? That’s usually bad for stocks and bonds, depending on the context. Are they headed lower, which could be good for markets? But are they headed lower for the right reasons, which could be good or bad, again depending on the context? The details of this get finicky really fast but the bottom line is that interest rates and uncertainty around what the Fed might do with them is constantly impacting markets, just sometimes more than others.

For example, markets dropped last week following a higher-than-expected inflation report showing the CPI rising at a 3.5% annual rate in March (well over the Fed’s 2% objective for average inflation). This continued a string of upside surprises over the last four months. Inflation is down from its post-Covid peak of 9+%, but cumulatively prices are still a lot higher than in 2019. Maybe we were all (including the Fed) a little presumptuous when it came to rate expectations for this year?

I most recently mentioned this lingering inflation/Fed policy dynamic in my last Quarterly Update. Investors had been expecting 1-3 rate cuts this year assuming that inflation continued to fall and cuts in this context helped push markets higher during the first quarter. These hopes were if not dashed, at least reset to maybe 1 cut this year as inflation remained stubbornly high. I mean, how could the Fed cut rates with inflation rising?

So here we are yet again focusing on the Fed, what voting members of the rate-setting committee are saying, how they’re saying it, and so forth, while investors pick through it all for clues. This uncertainty and second-guessing stimulate an environment of heightened anxiety. As a group, investors have a habit of overshooting with their market assumptions during periods like this and the quick change in outlook over the last couple of weeks may prove no different.

You’ve probably seen this play out in your portfolio balances so far this month. We began the year with a string of mostly positive weeks but the last two have been down maybe a percent or so each. Yesterday the trading day began positive before turning sour as the session wore on with the S&P 500 and NASDAQ indexes each down over 1%. Today as I write the market is set to open positive, so fingers crossed for what’s become known as Turnaround Tuesday.

We’re only down a few percent from our recent high and well away from 10+% correction territory. Still, that negative bias doesn’t feel very good but there are a several things to remember as we go forward:

We just finished a solid quarter and 2023 was a good year for investors. Many institutional money managers were prepped to rebalance in the new quarter anyway, so that also helps explain why some investors sold stocks as the second quarter began.

Bond prices will likely be volatile for a while because of what we’ve just discussed. But this helps us when investing new money into bonds or when rebalancing from stocks since bond yields have been rising. The benchmark 10yr Treasury now yields over 4.6% and Treasuries of various maturities pay more in interest than nearly all companies in the S&P 500 individually pay in dividends: from 4-5% on bonds versus about 1.4% average dividend yield across the S&P 500.

Most stock sectors are no longer “overbought”, as they had been for an extended period, so lower prices can present good opportunities to start putting longer-term cash to work. This is especially true when considered over a longer timeframe. Dollar cost averaging new money into stocks can help here, too.

Interestingly, according to my research partners at Bespoke Investment Group, early-April has often been poor for stocks when the first quarter of the year was positive. There’s speculation that this is due to Tax Day as investors sell from their investment portfolios to pay taxes, but that could be coincidental. However, the performance dip during the first part of April has often coincided with the rest of the year being positive. This could also be mere coincidence but let’s take good news where we can find it, right?

Otherwise and as we’ve discussed before, these spikes in volatility and price drops could get worse before they get better but are nothing to be overly concerned about. Ultimately dips in the market, even market corrections, are part of a healthy long-term investing cycle.

Have questions? Ask us. We can help.

The first quarter (Q1) of 2024 seemed to go by fast while yielding good performance from the stock market. Positive returns were broader based compared with recent quarters, and that was good to see. The Fed, interest rates, and economic projections played a role again during the quarter but, as with stock performance, the surprises were generally positive.

Here’s a roundup of how major markets have performed so far this year:

• US Large Cap Stocks: up 10.6%
• US Small Cap Stocks: up 5%
• US Core Bonds: down 0.7%
• Developed Foreign Markets: up 6%
• Emerging Markets: up 2.2%

As I just mentioned, solid performance was more prevalent during the quarter than has been typical lately. Popular stocks like Nvidia, Meta (Facebook), and Netflix had another banner quarter, up 82%, 37%, and 25%, respectively, but almost all other sectors performed well. Only Real Estate was negative, down by less than 1%. Energy, Communication Services, and Financial Services led the way, returning 13.5%, 12.7%, and 12.4%, respectively. Looking at stock styles, “Growth” again beat “Value” by returning nearly 13% during Q1 to the latter’s 8%. Overseas, European indices were up around 5% or so while Japan doubled that.

Core bonds were flat or down less than 1% depending on the index, while longer-term bonds were down more, perhaps 5% again depending on the index. Riskier types of fixed income like preferred stocks were up around 5% and high yield (or “junk”) bonds were up 1-2%. Cash performed well compared to bonds, up 1% or so. As has been the case for a while now, this lagging performance from bonds was caused largely by the shifting sands of market expectations about the economy and when and how much the Federal Reserve may lower interest rates.

We began 2024 with most investors anticipating the Fed would lower rates three times this year, perhaps beginning this Spring but definitely by Summer. The thinking was that inflation would continue to fall and slowing economic growth would force the Fed’s hand. Lower rates help stock and bond prices, so these expectations provided a tailwind for both as we entered Q1. However, inflation remained elevated during the quarter and the economy continued to surprise to the upside. By March even the Fed had raised its growth projections and this added fuel to stock prices while putting a damper on bond prices. The 10yr Treasury rate, a key benchmark, ended the quarter at 4.2% (and is nearly 4.4% as of this writing), up from about 3.9% as the quarter began. Taken together, higher bond yields responding to a strong economy is a good problem to have since it helps stock prices, at least for a while, but it’s not what the bond market wants to see.

Continuing the run of upside surprises during the quarter was when the list of Leading Economic Indicators from the Conference Board turned positive after 23 straight months of negative readings. The LEI is a composite of ten indicators and that many months negative had always coincided with a formally declared recession. That the LEI finally showed a positive reading as Q1 ended and without us falling into a technical recession was noteworthy. Only time will tell if we continue the positive trend, but news like this certainly helped stocks during the quarter.

However, some news reported as positive can also have a negative side. For example, the University of Michigan’s Consumer Sentiment Index section related to expectations for stock prices shows that typical investors are more bullish then they’ve been in nearly three years. It’s great to see consumers expressing more optimism than a year ago because that bodes well for the economy. The problem for stocks is that prices can rise in the short-term as investing gets popular again, especially given the interest in AI, but the rush of new money into the system sets up more volatility. This also perpetuates a cycle that often leaves late arrivals feeling left out of the party. That won’t be us because we’re more disciplined and deliberate, and we respect the long-term nature of investing, but it will be others.

Along these lines, all major stock indices ended Q1 in “overbought” territory, indicating that prices are at least one standard deviation higher than their 50-day and 200-day moving averages. The S&P 500, the index most commonly used to represent the US stock market, ended the quarter on a run of over 50 days overbought. Stock prices can and often do remain higher like this for a while, but the longer they do the larger any pullback could be. Remember that corrections can happen in the context of a longer-term bull market – they reset expectations and clean house a bit, so it’s best to be prepared for that in the weeks and months ahead. I’m not trying to be a downer after a quarter of otherwise good news, just realistic.

Planning for volatility is mental but also practical. You can rebalance your portfolio by selling portions of what’s been doing well and buying others that are still good quality and appropriate to own but have been lagging. I’m doing this for you if I’m managing your portfolio, of course, but rebalancing is important and often counterintuitive because doing so usually means selling amid otherwise good market conditions. Rebalancing can also help generate cash for near-term spending needs, so let me know of anything that might require dipping into your investment portfolio.

Have questions? Ask us. We can help.

So which is it, is inflation getting better or worse? You get different answers depending on who you ask. The impact of inflation can be intensely personal and people have stories to share, but investors and the markets care more about inflation at the “headline” level then about individual anecdotes. Metrics like the Consumer Price Index and variations on this theme that come from the government may seem less relevant when compared to your personal finances, but they do move markets.

As we’re all aware, official CPI numbers spiked a couple of summers ago following the pandemic before falling consistently. That helped drive stock prices higher and helped bonds as well. But CPI has flattened out for months now at a higher rate than officials at the Fed would like. That lack of direction has created a sort of information vacuum where theories and opinions abound. Maybe inflation is going to spike again like it has in the past. Or maybe inflation has reached a natural low point for this cycle and isn’t going all the way back down to the Fed’s 2% target anytime soon. Only time will tell but it could be awhile before we get a definitive answer.

In the meantime it’s important to remind ourselves that while past bouts of inflation have common traits, each has been unique and isn’t necessarily predictive. Along these lines let’s look at some work from my research partners at Bespoke Investment Group. They discuss the current inflation backdrop and provide some historical context. The bottom line seems to be that another big spike in inflation isn’t as likely as some would have us believe while consumer prices could remain higher than normal for a while. Markets can grind higher in that type of environment, but investors are still expecting less inflation and interest rate decreases from the Fed this year, so negative surprises there could bite a bit.

Now from Bespoke…

After headline CPI peaked above 9% in June 2022, the subsequent year of inflation data was a bull’s dream as reading after reading showed steady improvement. By June 2023, headline CPI was back down to 3%, and as is often the case, the most optimistic investors simply took the trend of the prior 12 months and extrapolated it forward, predicting 2% within a matter of months. For those investors, the last eight months have been frustrating as headline CPI has been bouncing around a range of 3.0% to 3.7%. With the progress on inflation stalled, the tide of sentiment at the extreme has turned from “inflation is going back to 2%” to “inflation is going to have a second wave higher just like it did in the 1940s and 1970s”.

Looking at the chart below, it’s easy to look at the post-Covid spike in inflation and not be concerned about the potential for a second wave like the ones that followed the prior two spikes during WWII and in the early 1970s. It’s a small sample size, though, and both periods had their own unique set of circumstances that are distinctly different from the current period.

In the 1940s, the US economy was contending with the shortages brought on by WWII in the first wave, whereas the second wave resulted from the pent-up demand and savings that accumulated during WWII. From that perspective, the current period has some similarities to the conditions surrounding the second wave of inflation in the 1940s but not the first. What’s worth pointing out about that period as well is that it didn’t take higher rates to get inflation back under control. In fact, throughout the 1940s, the Federal Reserve kept interest rates artificially low to finance the war, and the highest that the discount rate ever got during the decade was 1.5% in 1949.

The cause of inflation in the 1970s waves was an entirely separate set of circumstances, but it can be summed up mostly by one word – oil. In the early 1970s, before the 1973 Arab oil embargo, a barrel of oil was less than $5. Once the embargo commenced, prices immediately spiked and more than tripled to over $12.50 in less than a year. As prices stabilized in 1974, inflation subsided back below 5% over the next two years, but they started to surge again in 1979 with the Iranian Revolution and the overthrow of the Shah. Over about a year, prices nearly tripled again, causing the second wave higher in prices. The geopolitical situation in the Middle East is hardly sanguine right now, and a wider conflict would likely cause upward pressure on oil prices, but the US is not as reliant on Middle Eastern oil as it was in the 1970s, nor is the US economy as energy intensive.

Whereas shortages of oil drove inflation higher in the 1970s, the post-Covid wave was a function of pent-up demand and labor shortages. Shutdowns caused millions of workers to lose their jobs, and the government stimulus programs enacted to stave off an economic calamity had the deleterious effect of disincentivizing labor to return to the workforce once the economy reopened. The result was spiking wages. Most people still remember the stories of McDonald’s not only offering high starting wages but also signing bonuses of $500 or more.

Today, the labor market remains on a good footing, but it’s not as tight as it was three years ago, diminishing the chances for a wage-price spiral that would fuel a second wave higher. The employment component of the ISM Services report has been gradually (but steadily) trending lower from its post-Covid high in 2021 and has even come in below 50 (boundary between growth and contraction) in two of the last three months. [Last week’s] release of the NFIB report on small business optimism for February also indicated labor market softening. The charts below compare weekly initial jobless claims to the percentage of small businesses citing the quality of labor as their single most important problem (top chart) and the percentage of businesses citing jobs as being hard to fill (bottom chart).

Coming out of the pandemic, a record 29% of businesses in late 2021 cited quality of labor as their single most important problem, but that reading has declined steadily since then and plunged in February, falling from 21% down to 16%. That’s the lowest level since the Covid lockdowns and before that the summer of 2017. For the percentage of businesses citing jobs as being hard to fill, it’s been a similar trend with February’s reading of 37% falling to the lowest level since early 2021. As you’ll note in the charts of each NFIB series shown below, when they start to trend lower, initial jobless claims tend to move in the opposite direction. We could make a list of potential factors that could spur a second wave higher in inflation that stretches down to the floor, but it doesn’t mean that any of them are likely to happen.

Have questions? Ask us. We can help.