Broker Check
It's All About the Jobs!!

It's All About the Jobs!!

January 23, 2023
Share |

First things first… We hope you are having a great start to the new year. For us, here at Paragon Wealth, we are very excited to see what this year brings for you.

Okay, now back to the task at hand. This year has started out quite differently than last year. Last year, we started the first few weeks with the S&P 500 losing value, inflation rising rapidly, very low historical yields on gov’t bonds, and a Federal Reserve behind the curve on raising the Fed Funds Rate. This year, the S&P 500 has started with a nice gain, the worst of inflation seems to be behind us, interest rates on gov’t bonds are a little more normal, and the Fed has done a lot of work with the Fed Funds Rate.

With all that being said, the Federal Reserve (the Fed) is not quite done raising interest rates yet. The Fed will be meeting on Jan 31 and Feb 1st to decide how much they will be raising interest rates this time around. Currently, the Fed Funds Rate range is 4.25-4.5% and the general consensus is expecting the Fed to raise rates by 0.25%. If that turns out to be the case, it will bring rates to a level we haven't seen since Sep of 2007. There are members of the Fed that would like to see rates rise by 0.50%, however, they are the outliers.

What is a bit more obscure is how many more times the Fed will be raising rates in the future. Some are predicting an additional rate increase of 0.25% in March and then a pause, while others are predicting more rate increases for the rest of the year. Presently, the Fed expects the Fed Funds Rate to be around 5.1% by the end of this year, yet 1-year treasury yields are currently 4.71%. There is clearly some kind of disconnect.

What’s driving this disconnect? It’s not necessarily current inflation concerns at this point, as much as it is the fear of future, stickier, inflation because of the jobs market, in our view. As of the last Job Openings and Labor Turnover Survey, there are currently 10.46 million job openings. That same survey was 6.73 million in December of 2019, and the long-term average is roughly 6.5 million. So, the Fed’s concern is that the extraordinarily tight labor market will cause wage growth to stay above average (currently 6.17%) and lead to longer-term, higher, inflation. The “market” is telling the Fed that the inflation war is all but won, and the Fed is pushing back saying not so fast.

You may have heard of some of the high-profile lay-offs at Microsoft, Facebook, Goldman Sachs, etc., but honestly, white-collar tech and finance jobs make up a relatively small portion of the employment market. Small businesses are the backbone of the U.S. economy, and we are not so sure they will be so quick to lay people off. Especially, if they had a hard time hiring and training people through the pandemic. You have probably heard the same anecdotal stories we have about local small businesses not having enough workers to meet demand.

We feel it is prudent to stay defensive for the time being (you may have already noticed some rebalances that we performed in your account in that last week). We will be keeping a very close eye on the number of job openings and wage growth in the near future as we think that will drive the Federal Reserve’s decisions about interest rates. If we see those statistics continue to trend in the right direction, we may turn more optimistic and reflect that in the portfolios.

All this, and we haven’t even gotten into the debt ceiling debacle in Congress yet. Maybe we will write about that in the near future.

As always, it is a pleasure helping you achieve your goals. If you have any questions, please feel free to reach out!


The Paragon Wealth Team



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.