Over the last several months we have seen substantial short term volatility in the major market averages, but on a year-to-date basis, very little net change. Commodity prices have been under pressure, interest rates have remained at historically low levels and unemployment data, while appearing to be positive, has not resulted in any significant increase in wages.
What is going on and what should we expect?
There appears to be a consensus that the economy is drifting with a moderate upward trend. Inflation is well below the generally accepted Fed target of approximately 2%. Reported unemployment data, most recently 5.1%, looks good, but when you factor in the unusually low level of work force participation of less than 63%, the numbers are not all that positive. Moreover, despite apparently low unemployment, there is little or no upward pressure on wages.
Interest rates remain low. The Ten Year Treasury Note seems to be mired at or near 2% and the U.S. Treasury recently sold a three-month bill with a zero yield for the first time on record. The Fed, in the wake of considerable media and investor discussion, chose to not increase rates at its September meeting. More recently, speculation on the timing of a future rate increase has shifted from late 2015 to some time in 2016, maybe.
Oil prices appear to be stuck in a trading range of plus or minus $50 per barrel and supply continues to exceed demand. Major producers have not indicated any interest in curtailing output. Oil price optimists are pointing to reductions in the U.S. drilling rig count as an indicator of lower domestic output, but aggregate production continues to exceed demand. Oil prices may continue to hover around $50 well into 2016 and perhaps into 2017.
Does the foregoing represent the new normal for the economy and the markets? Perhaps. In the absence of any obvious catalyst for stronger growth, the outlook is likely to remain cloudy. However, it is important to remember that predictions are hazardous at best and, more often than not, after a material change, we end up discussing what happened rather than what we expected.
Given the uncertainties surrounding projections of the future, a well thought out long term investment strategy may prove to be the best alternative in an uncertain world.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®