Gill Capital Partners Labor Day 2020 Update
Happy Labor Day to our friends, clients, and partners. Labor Day marks the perceived end of the summer season, though the actual end of summer is the Autumnal equinox, which this year falls on September 22nd. Labor Day and the long weekend always seem to usher in a sense of change in the form of cooler temperatures, changing leaves, a return to school and the onset of fall activities. This year seems to offer a particularly unsettling sense of change amidst a global pandemic, civil unrest, a charged political environment, and a confusing investment environment. Before reviewing recent updates in the markets and economy, below are a few interesting facts about Labor Day.
Fun Facts about Labor Day
As discussed in our update before May Day, Labor Day grew out of the organized labor movement in the late 19th century and quickly became a national holiday. On May 4, 1886, a bomb explosion at a union rally in Chicago’s Haymarket Square led to violence that killed seven police officers and four others. This became known as the Haymarket affair. Following the Haymarket affair, a strong anti-union movement arose. The U.S. government to celebrate Labor Day on the first Monday in September instead of May 1st (International Workers Day) to avoid being associated with International Workers Day, which was linked to the political far left.
Grover Cleveland signed an act in 1894 establishing Labor Day as a federal holiday.
Can you wear white after Labor Day? The old tradition goes back to the late Victorian era, where it was a fashion faux pas to wear any white clothing after summer officially ended on Labor Day. White indicated you were still in vacation mode at your summer cottage.
How many people are union members today? According to the Bureau of Labor Statistics, there were 14.8 million union members in the workforce in 2017. The National Education Union is the largest union today with approximately 3 million members.
Labor Day marks the official end of hot dog season. The National Hot Dog and Sausage Council (no, we are not making that up) says that between Memorial Day and Labor Day, Americans will eat 7 billion hot dogs.
Market Update –The market has continued its relentless march higher on the back of zero interest rates, Federal Reserve stimulus and hope for a vaccine. This has occurred even in the face of continued weakness in labor markets, rising bankruptcies, valuation concerns and a tough environment for small businesses.
Federal Reserve – Changing Mandate?
The Federal Reserve has two stated goals - price stability and maximum sustainable employment, known collectively as the “dual mandate.” Put another way, the Federal Reserve’s job is to make sure inflation is under control and the labor market is robust and healthy. The Federal Reserve has put in place goals of keeping inflation around 2% and considers unemployment levels around 4% healthy. Last Thursday, Jerome Powell, the chair of the Federal Reserve, announced a major shift in how the central bank will guide the economy, signaling it will tolerate higher rates of inflation in the future and will make job growth the pre-eminent goal. Powell said, “the central bank’s existing target for inflation of 2% should henceforth be an average; in the face of persistently low inflation, the fed may pursue efforts to push inflation above the target.” Furthermore, Powell said “decisions to raise interest rates would be guided by a desire to avoid shortfalls of employment from its maximum level.” Put another way, the Fed is not worried about inflation and interest rates are not going up any time soon.
Our View – Basically, the Fed said they are comfortable allowing inflation to run hotter than their mandate to help get unemployment numbers down. This gives them effective cover to keep interest rates low for the foreseeable future. We will likely see interest rates spike higher intermittently on inflation fears, but the Federal Reserve will do everything they can to keep rates low. Low interest rates are generally supportive for stocks but create a tough environment for fixed income investors.
Politics – Polls tightening – President Trump saw a bump in the polls following the conclusion of Republican National Convention last week, and it does appear that the race is tightening. We hear from clients on both sides of the political spectrum that they are fearful of the other side winning as it will surely bring a correction in the stock market. While a correction in the stock market certainly seems warranted and is probably overdue, history has shown that the market has been able to generate returns for investors irrespective of which party is in office. The chart below demonstrates that neither party is necessarily better for the markets than the other, though people have been expressing the same concerns for decades prior to elections.
The chart reflects that the market has performed well under both republican and democratic leadership, which include periods of rising and falling tax rates and various crises and challenges. While this election feels more polarized and contentious than in the past, history tells us that the markets do not prefer one party over another. Rather, the markets like stability, certainty, and low interest rates.
We continue to have many conversations with clients who question the current rally and who feel compelled to do something; either “jump back in,” “get out,” or drink two glasses of wine per night instead of the customary one. We do see signs of froth, speculation, and excessive risk taking in this market and therefore do not believe that this is an environment where greed should dominate investment decisions. We continue to preach discipline around diversification and periodic rebalancing.
We hope everyone has an excellent Labor Day weekend and can find a way to get in one last barbecue, camping trip, or socially distanced get together before summer is officially gone.
As always, please let us know if you have any question or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.