10-15 Associates

Time To Celebrate?

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A quick look at the move in the markets for June would not be enough to reveal all of the headlines investors have had to digest.

We started the month with a surprise drop in the May jobs number, which was released on June 7th. The news that although the unemployment rate remained unchanged at 3.6%, a 50-year low, the economy only created 75,000 jobs for the month and the two previous months were revised downward. Economists had expected a number closer to 180,000, so the news helped to push bond yields further lower (surprisingly, the stock market finished the day higher). For many it confirmed the expectation that the next move from the Fed would be to lower rates later this year and put an end to the tightening cycle. This seemed to set the tone for the month. Anticipation of the G-20 meeting and some positive news on trade also helped allow the market to look past the escalation of tensions with Iran.

We closed the month not only with the best June since 1938, but the best first half since 1997. In addition to the markets moving higher, gold traded up 7% on the month and oil was higher by 9%. With all 11 sectors of the S&P 500 higher for the month, it was a broad-based move that reversed much of the damage of May. The S&P was up 6.89%, the Dow up 7.19%, and with technology the top performing sector up more than 9.05%, the Nasdaq gained 7.42%. This was despite the news that in addition to the surprise unemployment numbers, the Empire State Manufacturing Index experienced the biggest decline in its history going back to 2001. Posting its first negative read since October of 2016, the measure showed sharply diminished business expectations across several categories. According to Peter Boockvar, the chief investment officer at Bleakley Advisory group, “Bottom line, and I’ll be blunt, this number was terrible. It’s hard not to think this is all about tariffs and what it is doing to business confidence.”

The one-two punch of a weak jobs number and some deteriorating economic data started to take its toll on the consumer. The index of consumer confidence fell nearly 10 points during the month to the lowest level in 21 months. Despite the drop in interest rates, the Commerce Department reported that the purchase of newly built single-family homes posted an unexpected decline in May. New home sales decreased to the slowest pace since December. The University of Michigan consumer sentiment index also fell slightly in June but remains near historically high levels. The confirmation of 3.1% GDP growth came with both good news and bad news. The details of the report revealed that consumer spending rose at a slower rate than previously estimated, while business investment, exports, and government spending, rose at a quicker pace. Given that consumers represent nearly two thirds of GDP, it will be difficult to maintain current levels if the consumer continues to be more cautious.

As the economic data continued to show some signs that the economy was slowing, all attention was focused on the hope of any positive developments to come from trade during the G-20 meeting at the end of the month. The impact of tariffs is beginning to take its toll and some states are feeling the impact more than others. States that export agricultural products, electronics, and chemicals directly to China, will feel the impact most directly. California, followed by Texas, Illinois, and Louisiana, have taken the biggest hit. For California there is a lot at risk, their total trade with China tops $175 billion, which does not include Chinese investment in the state. Many businesses have been creative and are finding other markets for their products, shipping to places such as Taiwan, Vietnam, Korea and Japan. Economists worry that many orders continue to be “front loaded,” by trying to get shipments in ahead of even steeper tariffs to come. So far for the first four months of the year, volume in California is down 13%, which would be further impacted if orders have been front loaded. Unfortunately the result of this according to Erin Ennis, the senior vice president of the U.S. China Business Council, is that, “We’re likely to see in the coming months some increases in prices, not just of consumer goods but even for the industrial inputs that go in to the higher end products that companies use to be able to do business.” For consumers already beginning to lose confidence about the future, rising prices will add more anxiety.

This time of year brings about stress of another type. For all the households with graduates, either high school or college, it comes with many uncertainties and some additional stress. Families of high school graduates are facing the likelihood of a mountain of debt to get their kids through college, at what seems like astronomical cost. The headline cost alone for room and board is just the beginning of all the other expenses associated with a college student. For college graduates, it’s time to find a job and begin paying their own way in a world that is supposed to offer great opportunities ahead. A recent study indicated that the cost of an education is rising at more than twice the rate of inflation. Average is a hard number to pin on an education when you consider the difference by region and the option for public or private colleges. Taken as a whole, averaging all the numbers together, the study found that the average cost of a four-year education in 1989 was $26,902 and as of last year $104,480, representing almost a 5% annual increase per year. That statistic alone is hard to grasp, but when compared to the variables around this figure that matter, the reality for our college graduates is becoming tougher to justify with this cost.

Families of college students make big sacrifices to invest in these educations, in hopes of giving their kids a better start. The two things that come to mind for graduates is the starting salary that they will have the opportunity for and the cost of a home to settle down. Therefore, I thought it would be useful to look at what that education buys. I picked three years somewhat randomly, 1963 (the year I was born), 1985 (the year I graduated from college), and today. The numbers below tell the story:

Year Average Salary Cost of a Home DJIA
1963 $6,874 $17,600 6,112
1985 $24,289 $98,100 3,178
2019 $51,347 $377,200 26,585

This simple analysis is very telling. Over a similar period of time, the cost of an education went up four-fold, while the starting salaries for college graduates only doubled. From 1963 to 1985, salaries went up four-fold, but the cost of a home went up almost six-fold. During the same time, the stock market was down almost 50%, which might explain the interest in investing in real estate in the 1980’s. Unfortunately, college graduates are finding the same difficulty of affordable housing given that salaries have doubled since 1985, but housing costs are up almost four-fold. If you believe in the law of averages, either the cost of an education needs to go up at a slower pace, or salaries must rise to allow this generation, at minimum, an equal opportunity of the American dream to own a home. Food
for thought.

With summer now finally upon us, hopefully it will bring along more time for family and friends, a special vacation, or just some time for relaxing more than usual!

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