Chris

Sam, if we've learned anything over the last couple of years, it's that things can change very quickly. And just when the market seemed to have accepted the fact that the Warsh Fed had a hawkish bent and that they were likely to raise interest rates in February as part of their dual mandate to focus on inflation and full employment, they need full employment in order to raise rates to tackle inflation. And all of a sudden, we get the July jobs data that seems to call into question the employment side of their dual mandate. So, what are you thinking about that report and what it might mean for the Fed going forward?

Sam

Yeah, that's a great question, Chris. And I think we're going to do a deep dive into kind of all of the implications from this most recent data release. But let's start with the headline number, which, as you alluded to, was relatively disappointing, right? We saw that the economy lost a little over 20,000 jobs in July, which was well below estimates for an additional 70 to 80,000 jobs, depending on what economists you listen to. And concerningly, both the May and June reports were also revised down by about 100,000 jobs. So, in totality, what we have is the picture of a jobs market that, instead of showing solid but not spectacular gains in the early summer months, was really kind of facing a lot of structural headwinds. And as you mentioned before, that's a challenge for the Fed given their dual mandate, right. As we all know, the Fed's tasked with promoting stable prices and maximum employment, and everybody had been really concerned about that stable prices side of things, right? Inflation's been running hot. Folks are realizing that it's been well above target for a number of years, and given that dynamic, a lot of people were expecting the Fed to potentially hike rates as soon as September, right, at their next meeting. Now, with this really weak jobs report, though, that calls it into question, right? It's really difficult for them to justify raising rates to fight inflation if that's hurting their other side of their mandate, and you know the jobs side of things isn't doing very well. But I think there's a little bit more subtlety to the underlying details if you really break it down, right?

Chris

Yeah, I absolutely agree. There's no doubt the headline number was negative. There's no other conclusion you can draw from that. But we did see the unemployment rate actually tick down as part of this report, and this is the third summer in a row where we've seen weakness in the jobs data. Now, the last two years, the jobs data did stabilize and actually improved a little going forward. So, is there a chance that the market is too focused on this most recent data report, and it's still inflation that they should be worried about?

Sam

Yeah, I think that's absolutely a possibility, right. We have seen, as you've alluded to, that pattern of a little bit of weakness in the summer months over the past few years that's rebounded as we head into the fall and winter. We could see a similar pattern again this year when it comes to the job side of things. And it's important to remember that, you know, the Fed, while they are focused on, you know, jobs and inflation, they're not going to hyper-focus on any one data point, right? Just as we didn't expect them to take the most recent consumer price report as a sign that they were, you know, beating inflation, we don't expect them to take this most recent jobs report and say this is the only thing that matters anymore, right? They're going to look at the totality of the data and they're going to look at the trends, not just a single data point. With that being said, I think we'd be remiss to ignore the fact that the Fed's going to be data dependent, and when the data changes, our expectations should change accordingly.

Chris

Well, we've seen over the last couple of years that the market will take the most recent headline or data point and run with that until something changes. But I think your message is a good one. If the Fed's going to be data dependent, then investors should probably be data dependent as well. And remember that there are multiple data points coming between now and the end of the year. But the one data point that investors have relied on and that has remained consistently strong is corporate earnings reports. And we're almost all the way through the third-quarter earnings report for S&P 500 companies, and there were a couple big tech companies that had some one-time gains in their report. But if you strip those out, we're still looking at 30 percent earnings growth for the third quarter, which is a pretty stunning number in any environment. But when you factor in that corporate America is operating with all these headlines we've seen over the last year and a half, that is really impressive. And the good news from my perspective is, despite the fact that earnings are so strong in the second quarter, analysts are raising numbers for the third quarter and the full year. So, earnings growth remains strong. Estimates are moving higher. I think that should still act as a supportive backdrop for investors, no matter what these headline risks are that we might see between now and the end of the year.

Sam

Yeah, I completely agree, Chris. You know, as we're very aware, over the short term, headline risk can really impact markets and drive some serious kind of rollercoaster type of returns. But over the long run, it's fundamentals that drive performance, and the fundamentals have been impressively resilient for U.S. corporations of the last few years. So, certainly encouraging to hear that's the case, and expected to remain the case going forward, which should provide a nice tailwind for investors.

Chris

Yeah, I mean, not only are they strong, but they're broadening. We're seeing participation across sectors and industries in this earnings growth this year, which we haven't seen for the last couple years. And if you're seeing broad earnings growth, you should see broad parts of the market acting well, and we're definitely seeing that. And that's been a good thing for diversified portfolios. And I continue to believe the best approach to portfolio construction is to use diversification to meet long-term objectives, and that will help navigate whatever the headlines throw our way between now and the end of the year.

Sam

Yeah, that makes perfect sense to me. Thanks, Chris, and thank you for joining us. Join us again next month for another update from the Market Observatory.