Surprisingly Good Productivity, Jobs, Inflation And Trade News

Financial and economic news this past week was very good on four fronts: productivity, employment, inflation and trade.

The unemployment rate sank to 3.6%, the Labor Department announced on Friday morning, the lowest level since December 1969. The economy created 263,000 new jobs last month, far more than the 190,000 expected.

Inflation data released by the Bureau of Economic Analysis on Monday was much lower than expected, even though the job market is tight, and wages are rising. In addition, Treasury Secretary Steven Mnuchin said in a TV interview that he expected a finalized U.S. trade agreement with China next week, averting a trade war with the world's No. 2 economy.

But the newly released productivity data was the biggest and most positive surprise.

The Congressional Budget Office, the nonpartisan research arm of the legislative branch of the federal government, projects productivity will grow 1.8% annually through 2029, and the productivity rate for the past five years annually averaged just 1.3%. In contrast, newly released data shows that productivity surged at a quarterly annualized rate of 3.6% for the period ended March 31st. That's twice the long-term rate projected by the CBO.

Productivity enables employers to pay higher wages without raising their costs. Wages were up 2.8%, according to the latest Bureau of Economic Analysis figures ended March 31st, 2019, but the 3.6% productivity gain more than offset the cost of rising wages and benefits. Wages and benefits are the biggest causes of inflation, but companies are finding that rising wages are offset by productivity gains.

With wages rising without triggering inflation— a condition that defies conventional economic wisdom— the Federal Reserve is under no pressure to raise interest rates. This is not just a Goldilocks economy. Goldilocks is on steroids!

The Standard & Poor's 500 index closed on Friday at 2,945.64, fractionally off last Friday's record high of 2,945.83.

No one can predict the market's next move and past performance is not indicative of your future results. Stocks are only one asset class in a long-term strategically-designed portfolio. Stock prices don't always reflect fundamental economic trends but over the long-run economic fundamentals are the key determinant of corporate earnings, which drives stock prices. Since stocks are the main growth engine for Americans' retirement portfolios, this week's unusually good economic news made long-term optimists look smart.

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This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.

How You Can Manage Risk Aversion

During the early part of 2017, the stock market was rolling merrily along, with the Dow Jones Industrial Average (DJIA) breaking through the 20,000-point barrier for the first time. But the "Trump bump" won't last forever and some prognosticators are forecasting eventual doom and gloom. In all likelihood, the stock market will continue to experience ups and downs, just like it has throughout its history.

Regardless of whether the market is going up or down, or staying relatively stable, your portfolio should reflect your personal aversion to risk. Primarily, there are three types of risk to address in this overall philosophy:

1. Risk of loss of principal: This is the risk of losing the money you initially invested. Say you buy a stock for $1,000 that jumps to $1,200 before it falls back to $900. If you sell the stock at that point, you will have lost $100 of principal.

2. Risk of loss of purchasing power: You may be willing to limp along with modest returns, but you're losing money if the inflation rate exceeds your rate of return. For instance, if you acquire a bank CD paying a 2% annual rate and inflation rises to 3.5%, you're losing 1.5% in the purchasing power of that investment.

3. Risk of outliving your savings: Is your investment plan overly conservative? Remember that the stock market historically has outperformed most comparable investments over long periods, although there are no absolute guarantees. Therefore, you're likely to fare better with a well-devised investment plan than you would if you stuffed your money under a mattress. Otherwise, you might outlive your savings, especially given recent increases in life expectancies.

Risk assessment surveys can provide some insights. Typically, an analysis will reveal that you tend to be either a conservative, moderate, or aggressive investor, within certain ranges. Your portfolio should reflect this characterization.

If you indicate a more conservative bent, you may want to fine-tune your investments accordingly, taking into account asset allocation and diversification methods. Again, these strategies do not offer any guarantees, nor do they protect against losses in declining markets, but they remain fundamentally sound.

Other potential ideas are to weight your portfolio more heavily to bonds than you did in your younger days. The technique of "bond laddering," with bonds maturing at different dates, is a variation on this theme. Similarly, conservative investors may emphasize dividend-paying stocks and blue chips, as well as mutual funds and exchange traded funds (ETFs) offering diversification.

Every situation is different. Reach out to us to address your specific concerns.