Reading the Economic Tea Leaves – What the Numbers Tell Us
A deluge of financial and economic data has been poured on Americans so far this month.. During that time we have learned that inflation is more stubborn than many observers thought. However, at the same time, we have seen some prices drop and jobs outperform expectations.
That is a lot to absorb, so let’s unpack things in segments. We will look at:
- The Consumer Price Index (CPI) and what it tells us about food prices
- Inflation and interest rates
- The impact of more jobs on the economy
- Why the classic 60/40 portfolio is making a comeback
Groceries and CPI
While a meal out got more expensive last month, Eating at home got cheaper.
The CPI climbed .6 percent in March for an annual increase of 3.5 percent. However grocery prices stayed level, according to the Bureau of Labor Statistics (BLS). The Wednesday report shows “Food at home” prices unchanged from February through March. As a result, the annual increase for groceries stood at 2.2 percent at the end of last month. That is 1.3 percent below the CPI.
Meanwhile, the cost of eating out was up .2 percent over February’s .1 rise. That brought the “Food away from home” year-over-year total increase to 4.2 percent. That is .7 percent above the CPI.
Half of the six major grocery food price indexes declined last month. The largest drop was the five percent dip in butter prices. At the same time, cereal and bakery prices fell .9 percent. That marked the largest reduction in that category since the BLS began keeping records in 1989.
Of course, Some other grocery prices rose last month. The largest increase was in meats, poultry, fish and eggs. That category climbed .9 percent led by the 4.6 percent jump in eggs. In contrast, fruits and vegetables prices only rose .1 percent.
“What you will find is, if you go deeper into those numbers, the opportunities at grocery stores are improving significantly,” Agriculture Secretary Tom Vilsack told Bloomberg. “but it is restaurants where we are still seeing a bit of high inflation,”
Interest Rates and Inflation
At the end of last year, positive economic data led to speculation that the Federal Reserve Bank (Fed) would cut interest rates in the first half of this year. However, the economy is producing mixed signals.
On one hand, inflation ticked up last month. On the other hand, the economy continues to strengthen with prices of some staples coming down and jobs growth continuing.
“Now the economy is strong, we see very strong growth,” Fed chair Jerome Powell said late last month.”That means that we don’t need to be in a hurry to cut. It means we can wait and become more confident that in fact, inflation is coming down to two percent on a sustainable basis.”
The Fed’s inflation target is two percent. However, that applies to the personal consumption expenditures (CPE) index. The Fed feels that economic data in the CPE is a more accurate measure of inflation than the CPI.
The latest CPE inflation rate, as of the end of February, was 2.5 percent. March figures will not be available until the end of this month.
Jobs
“If you went into a lab and tried to design the perfect jobs report, you’d have a hard time coming up with something better than the one the Labor Department issued at 8:30 this morning,” Axios reported when employment figures were issued April 5th..
While an increase in jobs is generally good news for the economy, this month’s report was especially significant. It not only showed a strong and growing economy, but it had little or no impact on inflation.
The March jobs report found that employers added 303,000 jobs – well above expectations. That dropped unemployment from 3.9 percent to 3.8 percent. A Reuters poll taken before the report found that economists had expected new jobs to top out at 200,000.
The boost in employment is the greatest increase in 10 months. In addition, jobs numbers for January and February also increased upon revision.
Along with an increase in jobs, there was modest wage growth. Average hourly earnings climbed .3 percent. Year over year, hourly wages are up 4.1 percent.
Economic Data Supports Classic 60/40 Portfolio
As it did when February’s jobs report exceeded expectations, Wednesday’s employment numbers sent bond yields upward triggering a sell-off. At the same time, stocks were mixed.
The reaction of markets to economic data in the jobs report may be a further indication that the 60/40 investment portfolio has risen from the dead.
For decades the 60/40, or balanced, portfolio was the gold standard for investors wanting income and growth with reduced volatility. The idea was to develop a balance of 60 percent stocks and 40 percent bonds. Ideally, the stocks would rise in value over time while bonds provided safety to counter the volatility of stocks.
All was well until 2022 when the Covid crash upended the apple cart. Both stocks and bonds fell. However, as the economy emerged from the effects of the pandemic, both stock and bonds rallied. Then again, they relapsed when the Fed started hiking interest rates.
Now, stocks and bonds are rising with a strong economy and indications that inflation may be stabilizing.
Last year a 60/40 portfolio returned 18 percent, according to Morning Star. Although that is an excellent return for one year, advisors see the 60/40 portfolio as a long-term strategy.
“There is a lot of noise in the short term, so we tend to focus on the medium- to long-term with our forecasts,” said Ziqi Tan, a Vanguard investment strategist.
Tan’s colleague, Todd Schlanger, adds that stocks account for much of the short term noise, but balance is the key to long term success.
“While equities tend to gain much of the attention, more of the improvement in our projections stem from fixed income, with expected returns more than two times higher than they were going into 2022.“ Schlanger said. “Far from being dead, the 60/40 portfolio is poised for another strong decade.”
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