Second Quarter 2019 Commentary

Dennis O'Keefe |

There aren’t many years when the market rises this high in the first six months of a year.  Since January 1, the market is up 17%.  Although, as you recall, much of this gain was to make up from the late-year downturn we saw in 2018.

A similar dip occurred in May.  For the same reasons – the China trade deal.  The market is very temperamental when it comes to trade negotiations.  It also doesn’t help when the entire country is so politicized.  Any market move that is driven by the federal government is magnified.  

So while the market was down over 5% in May, it rose almost 7% in June to recover and to finish out the quarter up a few percentage points.

Another area that has had significant movement is the oil and gasoline market.  As you may remember from last quarter’s commentary, gasoline prices rose in the Spring due to seasonal change-overs and maintenance.

Since those efforts have been completed, gasoline prices have fallen by 30 cents or more per gallon.  Although the explosion and fire at the Philadelphia refinery last week will certainly cause at least a temporary bump in prices.   

Economic indicators continue to appear positive.  I will note that, while I do not completely believe the Unemployment number that the Department of Labor issues, the labor markets appear, from my very anecdotal survey, to be tightening.

In the course of any given week, I have the opportunity to travel through several industrial areas – including the Myles Standish Industrial Park near my home.  It has been a long time since I’ve seen this many “Help Wanted” signs outside of the establishments in these industrial areas.  It seems that factory and warehouse workers are at a premium right now.

We live in interesting times when it comes to hiring and labor.  For almost a decade, hiring managers could easily find numerous qualified candidates relatively quickly.  There were so many people out of work that finding the right person was easy, historically speaking.  

In the last couple of years, hiring supervisors have faced more and more difficult tasks.  No longer are there multiple candidates.  In fact, in many cases, they are constantly looking for new hires to fill positions that aren’t even vacant yet.

What we aren’t seeing within this labor tightening is a huge jump in wages.  If you recall back in the late ’90s, we saw a similar phenomenon in the labor market.  Wages skyrocketed in response.  Hiring managers seemed to be willing to hire just about anyone at just about any wage just to fill seats.

Today?  Well, it seems that, collectively, we don’t feel like that job “is worth $20 an hour.”  It’s a mindset shift.  For the most part, we’ve ignored inflation over the last decade.   Again, because hiring was so easy for so long, we all forgot that people are supposed to make more money over time.  It isn’t just the “evil corporations” or even hiring managers.  What happened in the Great Recession 11 years ago affected us profoundly – and this is one of the byproducts of that.

Twenty dollars today isn’t buying what $20 bought back in 2009.  In fact, it’s buying a lot less.   It is hard – near impossible here in the Northeast – to continue to find and retain high-quality candidates at $40,000-60,000 a year.  (That translates to $20-30/hr.)  You can’t make ends meet and pay the bills at that wage.  In fact, a married couple with two of those jobs is not likely to get ahead.  There is no bigger house.  No children.  No disposable income.  

I suspect that in the near future, we will see this wage inflation accelerate.  We’ve seen hints of it, but nothing like the increased efforts seen at US companies to find qualified employees.   While it will be great news for employees across the country, it will also indicate that we are that much closer to the end of this economic cycle.

For now, I recommend no significant changes to our portfolios.  If you are a client, you might see some trades to balance your allocation in the coming weeks.  Some of our investments have done well enough to indicate it may be time to take some profits.  Otherwise, we will be continuing on the same track as we have before.  

Donna, Anna and I wish you a very safe and happy Independence Day.  If you have any questions or need anything at all, please don’t hesitate to call or simply reply to this email.  Thank you for your continued support and trust.  Happy Birthday, America!

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