Week of March 7, 2016
Markets were generally positive last week as investors wrapped up February and headed into March. Last week was packed full of economic releases, pushing and pulling the markets every which way. The Fed's Beige Book, non-farm payrolls and PMIs were just a few that kept investors on their toes.
The S&P 500 was up 2.67% while the Dow Jones Industrial Average and the NASDAQ Composite were up 2.2% and 2.74%, respectively. European stocks trended higher, closing up 3.95% for the week as measured by the STOXX Europe 600 index. Asian stocks also traded higher with Japanese Nikkei 225 Average up 5.1% and Chinese Shanghai Composite up 3.86%.
The PMI, or officially the Purchasing Manager's Index, is a measure of economic growth that looks at how inventories are faring for businesses. A measure above 50 indicates economic expansion as businesses are holding more inventories for growing expected demand. A reading below 50 hints at economic contraction as businesses reduce inventories, believing an economic slowdown may be on the horizon. The Chicago PMI which looks at the mid-west region, slipped to 47.6 in February from 55.6 in January. Economists were expecting a more moderate decline to 52. A quick drop in production across the region was the primary driver of the lower reading as businesses experienced a decline in new orders and lowered their own production and inventories in response.
Source: ISM Chicago, Inc.
As the Fed manages its policy around a 2% inflation target, no data release is watched closer than the non-farm payrolls. Essentially a measure of unemployment and job creation, non-farm payrolls indicate how close the economy is getting towards full employment. The Bureau of Labor Statistics announced on Friday that the US economy added 242,000 jobs in February with the headline unemployment rate holding at 4.9%. Historically, "full employment" means roughly 4-6% unemployment as there is a natural amount of workers moving in and out of the workforce. The reason the Fed and many others watch the non-farm payrolls release so closely is because lower unemployment tends to put upward pressure on wages which, in turn, is an important ingredient in driving inflation. Said another way, as the supply of "labor" goes down, the price must come up as employers have to increasingly offer better salaries to entice qualified candidates to leave their current job. This dynamic also happens to be one of the reasons inflation has remained stubbornly below the Fed's target. Since unemployment's most recent peak during the Great Recession, employers have been hiring up slack in the labor market and were able to offer lower salaries to those qualified candidates without a current job. Now that the slack is nearly up, employers may have to offer higher compensation which should, in turn, help drive wage growth and inflation for the economy. However, according to the data release, wage growth fell a modest 0.1% for the month as the majority of the job growth came from part-time sources.
Source: Bureau of Labor Statistics
The Fed's Beige Book, a monthly report that reviews domestic economic activity across the Fed's 12 districts, indicated that, while the overall economy continued to expand, half of the districts noted slowing growth in their regions. However, the Fed reported that consumer spending rose across the majority of districts. This is important because consumer spending accounts for more than two-thirds of US output. On a broader basis, most of the districts saw improvement in their respective labor markets as we mentioned above and, despite the modest drop in wage growth last month, some regions saw some upward pressure on wages. The Fed will consider all this information in the policy meeting on March 15th and 16th and, given the outcome of last week's reports, the central bank will likely keep rates steady. The strong job growth, however, sets the stage for possible rate increases later this year if the economy continues to grow.
Fun Story of the Week
Undoubtedly, many of our readers are familiar with the plastic toy brick-maker, LEGO. Many of us have fond memories of building on the floor as a child, helping a son or daughter construct their masterpiece or wincing in pain when you step on a piece that just so happens to be sticking straight up in the carpet. However, not many are familiar with LEGO's storied history. The word "LEGO" is actually an abbreviation of two Danish words "leg godt" which means "play well." Coincidentally, it wasn't learned until a few years after the company's founding in 1932 that the Latin translation of "LEGO" means roughly "I put together." While we all know LEGO for its plastic bricks, the company's first manufactured toys were actually wooden animals, such as ducks and fish. It wasn't until 1949 that the company began creating bricks similar to what we see today. In fact, it took another nine years for LEGO to refine the design to its current form. Indeed, it is hard to imagine the 2x4 brick that serves as the foundation of anyone's imagination is over fifty years old. Of the more interesting facts, LEGO happens to be the world's largest tire manufacturer and the set with the most pieces is their Taj Mahal which was launched in 2008 with 5,922 bricks. It takes roughly 27 hours to build and likely as long just to separate the pieces.
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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. * The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. * The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index. * The Stoxx Europe 600 Index is derived from the Stoxx Europe total Market Index and is a subset of the Stoxx Global 1800 Index. With a fixed number of 600 components, the Stoxx Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region. * The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. * The Nikkei 225 Average Index is a Japanese index that tracks the top 225 companies listed on the Tokyo Stock Exchange. It includes the most liquid Japanese stocks listed in the first section of the Tokyo Stock Exchange. It is price-weighted and yen-denominated. *The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. * The Chicago Purchasing Managers Index (PMI) is an index released monthly and it indicates how vibrant regional manufacturing activity is. The index reports on data such as production, new orders, order backlog, inventories, prices paid, employment, and supplier deliveries.
CNBC, March 2016, http://www.cnbc.com/2016/03/04/us-nonfarm-payrolls-totaled-242k-in-feb-vs-190k-estimate.html
CNBC, March 2016, http://www.cnbc.com/2016/02/29/chicago-pmi-at-47.6-in-feb-vs-54.0-reading-expected.html
Wall Street Journal, March 2016, http://www.wsj.com/articles/fed-beige-book-economic-activity-expanded-in-most-districts-1456945560
CNBC, March 2016, http://www.cnbc.com/2016/03/02/feds-beige-book-economic-activity-increased-in-most-regions.html
Lego.com, March 2016, http://www.lego.com/en-us/aboutus/lego-group/the_lego_history