October 7, 2023 | Jobs Report, JOLTs Report, Oil Prices, Investment Returns and Social Security

Jobs Report
The September jobs report was released on Friday, October 6 and at first glance it was scary because it was so good. But then as the day moved on the report was analyzed further and positive information was found. What was scary about the report was 336,000 jobs created, twice as much as expected. This caused concern that there would be a definite increase in interest rates in November by the Fed. Also giving more concern was the July and August numbers were revised higher 119,000. But as the day progressed and the numbers were analyzed, it was understood that average hourly earnings had only increased 0.2% below the expected 0.3%. This is also the mildest we have seen over the last 18 months. The federal reserve has been concerned about wage growth, and this report is proof there should be no concern on wage growth. The strength in the job market was seen in leisure and hospitality, healthcare, professional, scientific, and technical services. What this report is revealing is that we can increase people working but yet wages are not getting out of hand which is something the federal reserve was concerned about. The consumer price index which is the gauge on inflation will be released next Thursday, October 12 and based on what we are seeing here at Wilsey Asset Management we believe it will be a good report and if that holds true, we could be done with anymore rate increases for the rest of 2023 which raises the green flag to invest in the right equities.

 

JOLTs Report
The JOLTs report showed Job openings rose by nearly 700,000 in the month of August to 9.61 million. This easily topped the estimate of 8.8 million and means there are still about 1.5 jobs available for each unemployed worker. Layoffs also remained low at just 1.7 million. While this is positive for the labor market, concerns remain that a tight labor market could pressure the Fed to continue tightening policy. I believe there are other factors on the inflation front that should lead to a stabilization from the Fed rather than a continued increase. The positive news continued to push treasuries higher, and the 10-year treasury pushed passed 4.75% to reach its highest level since 2007.

 

Oil Prices
We have seen a dramatic rise in gas at the pump which has been caused by the rising price of oil. Just a couple of months ago at the beginning of July oil was at $71 per barrel, it has increased substantially and ended September at $91 per barrel. Yes, that is a 28.2% increase. At the end of September, we also saw US commercial crude inventories at their lowest level since December 2022. Before you jump to conclusions and think gas prices are going to continue to rise, let me give you some fundamentals behind the scenes. Because of the rising prices gasoline consumption is declining and if prices were to hit $100 per barrel that would cause a further decrease in consumption. It is a world market and China has built up over the last three years a very large inventory of oil which they acquired at low prices. This means they likely will not be coming back into the market, since they have more than adequate supplies. Also, if oil were to hit $100 per barrel that could bring more inventory online increasing the supply and also it is possible that Saudi Arabia would bring back some of their production that they took off line earlier this year. Keep in mind an unexpected supply shock would cause oil prices to continue to rise, barring that scenario I believe we should be close to the top!

 

Investment Returns
Last week in a newsletter we said that we see a very good fourth quarter for investors as it could produce some good fourth quarter investment returns. The personal consumption expenditures price index (PCE) was released and came out at 0.4% last month. Core prices which exclude food and energy only rose 0.1% which is the weakest monthly increase since 2020. If you look at June through August of this year core prices only increased at 2.2% on an annualized basis, which is very close to the Fed’s 2% target. Based on this data, I believe the Federal Reserve once again will pause at the meeting on October 31st. I’m seeing no indication of rising inflation overall, even with the increase in prices at the pump I believe there will be another positive PCE Report released about a month from now and then no increase in interest rates once again in December. If you agree with this data, you should not be sitting on much cash or short-term instruments that pay 4-5%. You should be investing that money in good quality equities or else you’ll be scratching your head in January on what you missed.

 

Financial Planning: Social Security: A Solution to Insolvency?
It is well known that the Social Security trust fund is running out of money. It is projected that the program will be insolvent in about 10 years at which point beneficiaries would only receive 80% of their expected benefits. While we think it unlikely this will come to fruition, there will absolutely be changes to the program over the next decade. Most proposals to fix this problem involve an increase to taxes or a decrease in benefits in some capacity as the Social Security trust fund by law can only invest in US treasuries and cannot borrow. Over the last few years, US Senators Bill Cassidy and Angus King, who sit on opposite sides of the isle, have been working on an alternative solution. The idea is the federal government would borrow $1.5 trillion over 5 years for an “unrelated” third party to invest for the next 75 years. In the meantime, the Social Security insolvency would be financed with additional government borrowing. After 75 years, the accumulated investment principal would repay the $1.5 trillion plus any additional borrowing and accumulated interest and the balance would go to the Social Security trust fund. Over any 75-year period the US stock market has always far outpaced the return of US treasuries so in theory this would solve the issue without tax increases or benefit cuts, but this borrow-to-invest strategy, known as a pension obligation bond, is frowned upon for government agencies. Between the borrowing and investing, not to mention government corruption, there’s a lot that can go wrong here, and failure in a program as large as Social Security would be catastrophic for American taxpayers.