Weekly Good Reads: 5-1-1
Jobs Report, Recession Indicator, Bond Yields, Volatility, Family Trusts, Wealth Effect
Welcome to Weekly Good Reads 5-1-1 by Marianne, a 25-year investment practitioner writing about investing, economy, wellness, and something new I learned in AI/productivity.
Each week I share insightful/essential readings, charts, and one term, incorporating some of my market observations and weekly change tables. I look beyond data and share something enlightening about life, health, technology, and the world around us 🌍!
Here’s the quote of the week:
Those who are not looking for happiness are the most likely to find it, because those who are searching forget that the surest way to be happy is to seek happiness for others.~ Martin Luther King
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Market and Data Comments
August is traditionally the most volatile month in the market due to lessened liquidity, and so far it does not disappoint.
Upon the weaker-than-expected July US non-farm payrolls (+114K), the July unemployment rate of 4.3% (and therefore the trigger of the SAHM rule, a real-time indicator of a recession to call for automatic economic stabilizers created in 2019 for faster COVID policy response), the VIX shot up 5 points to 23.39% and the MOVE index jumped almost 10 points to 112.3 on Friday (+7% and +14.5 points for the week respectively). As a result, US stocks cratered by 2.1% (S&P500), 3.4% (Nasdaq), and 6.7% (Russell 2000) for the week.
With weaker Tech earnings (Amazon, Intel, ARM, etc.), the Nasdaq 100 entered the 10% correction territory on Friday.
Bloomberg pointed out that the SAHM rule is a lagging indicator of recession and is not a necessary or sufficient condition for a downturn, especially in this most unusual of cycles.
The US 2Y government bond yield fell 50bp to 3.88% and the 10Y government bond yield fell 40bp to 3.79% this week (see chart above). The US (2-10Y) yield curve has steepened another 10bp. An inverted yield curve is not necessarily the predictor of recession but a steepening of an inverted yield curve usually is.
The question is: are we in a recession and what is the Fed going to do facing the latest data? The latest July ISM manufacturing, which has contracted for 4 consecutive months to 46.8 from 48.5 in June and the services ISM also contracted for the second month in July, indicate business and orders are slowing. The unemployment rate rose from a 5-decade low of 3.4% in April 2023 to 4.3% in July.
However, the non-farm payroll numbers do not indicate a recession and both 1-month and 3-month changes are in the middle of the 90-percent confidence interval (chart above).
(the creator of the SAHM rule) also remarked she did not over-read one data point and the Pandemic has disrupted the labour supply and immigration has vastly increased the labour supply. Still, the momentum of the labour market weakening is alarming, and once the SAHM rule is triggered, the unemployment rate historically could rise very quickly.Fund Managers and economists have been chanting “The Fed is behind the curve,” as the current rate level is inconsistent with where inflation or the economy is today. Traders have been most dovish in this cycle, betting a greater chance of a 50-basis-point reduction in September in the Fed Funds rate, plus more than one per cent of easing by the end of 2024. The Fed is unlikely to react to one data point, and the August jobs data will confirm if the unemployment rate is a trend or an abnormality.
The Fed has the dual mandates of inflation and full employment, and as Powell said, “I would not like to see material further cooling [of the jobs market]”, implying rate cutting is on the table, especially since the July jobs data is weaker than expected (see Econ/Invest #1 and #2.)
The Bank of England finally cut interest rates by 25bp this past week with Barclays expecting a cautious tone and the next cut to be November. The Bank of Japan hiked interest rates by 25bp, citing upside inflation pressure from import prices due to the weak Yen, causing the Yen to rally vs. the dollar by about 4.7% and the stock market dropping by the same amount this week (stronger Yen hurts exports earnings.)
This coming week we will monitor the July S&P Global Composite PMI and the July Euro Area Composite PMI on Monday, the July exports growth in China on Wednesday, the July CPI and PPI in China on Friday and China’s July Total Social Financing.
Economy and Investments (Links):
This is the Jobs Report We Were Afraid Of (Axios Macro)
The unemployment rate is 4.3%, up from 4.1% in June — still low. But historically, when the unemployment rate moves up as much as it has this year (the rate was 3.7% in January), it doesn't stop there.
Employers added 114,000 jobs in July, not too bad given that the economy has been near full employment — but that represents a significant deterioration so far this year. Over the last six months, job growth has averaged 194,000 jobs a month, down from 251,000 in 2023.
This week alone, new data showed the rate at which companies hired new workers declined in June, the number of people filing jobless claims reached its highest level in 11 months, and business activity for manufacturers plunged in July.
The Countdown to US Rate Cuts Is Actually Here (Bloomberg or via Archive)
Bloomberg Chief US Interest Rate Strategist Ira Jersey, Chief US Economist Anna Wong and Claudia Sahm, Chief Economist at New Century Advisors React to Today's Jobs Numbers. (Bloomberg Radio and Full Podcast)
Finance/Wealth (Link):
What are Family Trusts (The Conversation)
Family trusts are typically set up by a family member for the benefit of the family as a whole. A family trust deed can nominate multiple beneficiaries. These could include not only parents, children, grandchildren and other family members, but also other trusts and even companies.
Family trusts are often used to take advantage of their tax implications. This is because between years, trustees can vary the distribution of income among beneficiaries.
Any undistributed income left in the trust is taxed at the top marginal tax rate of 45% [in Australia]. But if distributed to beneficiaries with lower personal marginal tax rates, it is instead taxed at those rates, which can lower the total tax paid.
+ How Do 9 States Get by With No Income Tax? A Tax Expert Explains the Trade-offs They Choose (The Conversation)
Wellness/Idea (Link):
How Redefining Happiness Can Transform Your Life (Big Think)
Studies show that using your unique strengths makes you feel happier, helps you grow, and offers a venue for self-expression. People who are connected to others live longer, happier lives. Integrating the two leads to a sense of meaning and purpose makes an impact on the world and provides you with the feeling that your life matters.
Here was the answer to my question: To be happy, discover who you are, and share yourself in ways that help other people. This is the path to happiness, and I call it New Happy.
One Chart You Should Not Miss: Over Half of the Smallest 1000 Listed US Companies are Unprofitable
According to BCA Research, the share of unprofitable companies in the largest 500 US companies is trending towards historically low, and that of the smallest 1000 US companies is trending up now at about 53% of total, the highest level since the 2008 Great Recession.
Note the market has already priced in ~119bp of rate easing this year, and if the Fed cuts less than that (very likely given core inflation at 3.3% is still largely above 2%), small caps can find it hard to rise further.
One Term to Know: The Wealth Effect
The Wealth Effect is from behavioural economics and posits that an increase in consumers’ investment portfolio or housing prices will cause them to spend, due to rising consumer confidence, even without an increase in income or the fixed costs being the same. This also applies to businesses which will increase their capex spending and hiring when their asset values increase.
Economists Case and Shiller in their paper: “Comparing Wealth Effects: the Stock Market versus the Housing Market” using data from 1982 to 1999 discovered that rising housing prices (not stock prices) have a more significant impact on increased consumption.
A 2021 paper in the American Economic Review, however, found that an increase in local stock wealth driven by aggregate stock prices increases local employment and payrolls in nontradable industries (government, education, health care, construction, and retail). For every dollar of increased stock market wealth, consumer spending increases by 32 cents. Note that the upper quintile of income earners is responsible for about 50% of household spending.
RSM, using a back-of-the-envelope calculation, estimated that the rebound in stock prices in 2023 led to about +1.1% to +4.8% growth (if multiplier effect) in nominal GDP.
While the wealth effect can be good for the local economy (increased spending on food, houses, etc.), it is not necessarily good for the individuals and households because if income is not increased, the higher consumer spending has to come from either savings/debt or selling assets, making the individuals/households net-poorer.
[🌻] Things I Learn About AI/Productivity:
Courtesy of Max from 100 School, I learned about Dynamic Prompting, developed and refined by Linus Ekenstam, which helps you control the key elements of an image, using just text commands.
The 6 elements of dynamic prompting are:
Subject - The focus of the image.
Acting - What the subject is doing/feeling/emoting.
Style - Features of the subject including clothing, ethnicity, eye colour, hair colour, etc.
Place - Location of the image, also the year or era can be added to impact style.
Time of Day - Exactly as it sounds, but also helpful to tweak the lighting.
Photographic Equipment - Controlling the details of film, lens and camera settings.
I tested this prompt using the free Adobe Firefly (Text to Image), which gives a pretty realistic picture: “A female swimmer riding the wave wearing a rainbow colour swimsuit and goggles in Hawaii at dusk UHD image, hyper-realistic.”
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