Week of September 7, 2015

Investors looking for a fresh start to the new month were disappointed last week even with some favorable economic news. The “good news is bad news” dynamic returned when Wall Street interpreted the jobs report on Friday as sign that the Fed is now more likely to raise interest rates when it meets in a little over a week. This pushed markets lower. The S&P 500 slipped 3.4% for the week, its second decline in the past three weeks. The index now sits just shy of correction territory having collapsed 9.8% from its high in May. The Dow Jones Industrial Average fell 3.2% and the Nasdaq Composite closed down 3% for the week. The continuing volatility is beginning to spook retail investors. The American Association of Individual Investors reported that equity allocations were reduced by 2.4 points in August to 65%. This is the lowest percentage allocation to equities in 10 months.

Tepid Jobs Report Offers Split Decision

On Friday, Wall Street was looking for a jobs number that added clarity to the timing of Federal Reserve’s initial rate hike. It didn’t get that; both bears and bulls on the U.S. economy were given data to chew on. The Labor Department reported that the U.S. added 173,000 jobs in August, well below expectations of 217,000. But, July’s figure was revised upwards by 44,000 jobs, wages displayed some growth at 2.2% year-over-year, and the unemployment rate fell to 5.1%. However, we note that the August payroll number is known for being heavily revised higher. The average revision for the past fifteen years suggests the final figure will surpass 235,000 jobs. If this occurs, the average monthly gain for the past year remains very respectable around 250,000. If the Federal Reserve is only considering employment data (and ignoring slowing growth elsewhere) this report may be good enough to move off of zero in September.

_{Source: Wall Street Journal, August 2015 (subscription required), http://www.wsj.com/articles/the-jobs-report-and-stocks-whats-not-to-hate-1441382913}

Volatility Returns to Oil Market

Oil prices continue to bounce around creating some of the highest volatility in the past 25 years. Last Monday capped a 25% gain over a three day period, the largest of its kind since Iraq invaded Kuwait in 1990. This move was spurred by OPEC hinting that it was ready to talk to establish a “fair price” by controlling output. This is a dramatic change from the recent stance of protecting market share at all cost. Later in the week, the price fell on U.S. government data that showed increased inventories at the Cushing, Oklahoma storage facility that showed a 4.7 million barrel increase in stockpiles. Analysts had expected just 100,000 barrels. U.S. Crude prices fell another 1.5% to just over $46 a barrel on Friday, in line with equities. This came even as the domestic rig count was reported to be the lowest since mid-July and down nearly 60% from the same time last year.

China Manufacturing Data Disappoints

Investors who are concerned about a slowing Chinese economy were greeted with data early last week that confirms their fears. That country’s official Purchasing Managers’ Index fell to 49.7 in August. This is the first time since February that this indicator of industrial production has fallen below 50, and it is the lowest reading since August 2012. A PMI reading above 50 implies economic expansion while a number below indicates contraction. While the industrial weakness confirms other data pointing to a slowdown, China bulls argue that the August reading may be temporary. Parsing the data suggests the contraction was concentrated among large firms that could have been affected by government mandated closures to curb air pollution before a large military parade.

Fun Story of the Week

When you take out a worn $20 bill to pay for your morning latte at Starbucks, have you ever wondered how many wallets it’s been in before yours? A recent study conducted by OnStride Financial might provide some clues. Researchers at the firm tried to figure this out for British bank notes. They estimated that a £20 note will be used more than 2,325 times over its average 9-year life. The analysts calculated the frequency by solving for the velocity of money using the “equation of exchange.” The Bank of England publishes data for three of the four necessary variables (number of notes in circulation, average transaction value, and number of transactions). Plugging these into the equation reveals a bank note changes hands on average 147 times per year.

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_{Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC. Certain associates of Joseph W. Jacques, CPA, CFP^TM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFP^TM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.}