FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
October 8, 2019

Unemployment 50-Year Low – Another Rate Cut In October?

IN THIS ISSUE:

1. Unemployment Rate Falls to 50-Year Low, But Wages Stalled

2. Fed Considers Another Rate Cut in October – Really?

3. Increasingly, Investors Seek Safety in Convertible Bonds

4. Personal Note: Hip Replacement Surgery Next Week

Overview

There was a lot of news over the last week, but today I want to focus on last Friday’s jobs report and the growing likelihood the Fed will cut interest rates again at the end of this month. I’ll also discuss the growing popularity of “convertible bonds” and why they could be a valuable addition to your portfolio.

The unemployment rate for September unexpectedly fell to 3.5%, a 50-year low, from 3.7% in August. That’s great news, right? Yes, except that new jobs were lower than expected and wages were flat last month. That prompted more analysts to predict a recession just ahead – and the end of the bull market in stocks. What else is new? I’ll break the report down for you below.

There is a growing expectation that the Fed will cut rates a third time this year at its October 29-30 policy meeting, when earlier it was not expected to cut rates again until its December meeting. If the Fed cuts its key interest rate again at the end of this month, for the second month in a row, I think the Fed risks looking desperate. Is this warranted? I don’t think so, but we’ll discuss it.

Unemployment Rate Falls to 50-Year Low, But Wages Stalled

Last Friday’s unemployment report was ho-hum, not great but not terrible either. Net new jobs rose by 136,000 – again, not terrible but below the pre-report consensus of 145,000. Private sector jobs rose by 114,000 while public sector (government) payrolls rose by 22,000. Prior estimates of job growth in July and August were revised up by 45,000 jobs for the two-month period.

The headline unemployment rate unexpectedly fell to 3.5%, the lowest in 50 years. On the negative side, average hourly wages for workers were essentially flat, so the rate of growth over the last 12 months fell to 2.9% from 3.2% previously.

With manufacturing activity weak, the bulk of the hiring in September was concentrated in the services sector. Education and healthcare providers filled 40,000 positions. As noted above, government added 22,000 workers in September, and only 1,000 of the jobs were due to federal hiring for the 2020 Census. Economists had expected a much bigger increase in census workers. Retailers shed 11,000 jobs and manufacturers dropped 2,000 workers.

Stepping back, the pace of job growth has slowed from 223,000 per month on average in 2018 to 158,000 over the last three months. While the September jobs report was slightly weaker than expected, it was still solid and raised hopes among some that we can avoid a recession.

The report came on the heels of a string of weak economic reports, including a plunge in manufacturing activity to more than a 10-year low in September and a sharp slowdown in services industry growth to levels last seen in 2016, which had heightened fears the economy was flirting with a recession.

Fed Considers Another Rate Cut in October – Really?

In the wake of the disappointing manufacturing and services reports noted above, the odds of another Fed rate cut at its October 29-30 policy meeting soared to over 90% at the end of last week. Previously, most Fed-watchers (including me) had expected another rate cut at the December 11-12 meeting, not this month.

You will recall that the Fed cut its target range to 1.75% to 2.0% just last month for the second time this year. So, it would be unusual for the Fed to cut its key rate a second meeting in a row. To me, that would look desperate, so I tend to doubt it. Yet the Fed Funds odds suggest it will happen.

Assuming there is a rate cut this month, then the odds of another cut in December fall to around 50%. If we don’t get a rate cut this month, then the odds are above 90% that we’ll get a rate cut in December. Some speculate if there is no rate cut in October, the Fed will consider a 0.50% cut in December. I find that doubtful.

In a speech last week at the University of California at San Diego, New York Federal Reserve Bank President John Williams said that while the US economy looked to be in a “favorable place” when viewed through the rearview mirror, the outlook through the windshield ahead was “mixed.”

Trade uncertainty, geopolitical risks and other factors were creating “crosscurrents” that needed to be navigated as the Fed tries to keep the economy in “roughly” the same place it is currently, Williams said.

He also warned that the inverted yield curve showed negative investor sentiment about the outlook for US economic growth, a signal he said he “takes seriously.” Still, Williams said the labor market was strong and the US economy was in a positive place compared to the rest of the global economy.

Williams left the door open to further adjustments to monetary policy to manage those crosscurrents, but gave no hint of whether or when any further rate cuts may be needed – in sync with the view of Fed Chair Jerome Powell. Bottom line: We just don’t know.

I continue to believe the Fed is still very nervous about the inverted yield curve, even though the spread between 2-year Treasuries and 10-year Treasuries has remained slightly positive over the last several weeks. Yet the yield on 3-month Treasury bill (1.67%) is still slightly higher than the 10-year Treasury note (1.54%). As such, I expect the Fed to remain dovish just ahead, meaning I think we’ll get one more rate cut this year, either at the end of this month or at the December 10-11 meeting.

Increasingly, Investors Seek Safety in Convertible Bonds

Concerned that the long bull run in stocks may have run its course, yet tired of high-yield bonds that don’t live up to their name, more and more investors are turning to convertible bonds. We have been recommending convertible bonds for years at Halbert Wealth Management.

The longstanding appeal of convertible bonds is that they offer some of the safety of bonds with the upside potential of stocks. Heading into the end of the year, some investors say the asset class is especially attractive. Stocks are hovering near record highs, yet concerns persist about an economic slowdown that could hit share prices hard.

In basic terms, convertible bonds are unsecured corporate bonds that investors can convert to shares if the company’s stock hits a predetermined price, known as the “conversion price.” If a company goes bankrupt while a convertible bond is still a bond, investors are paid after secured creditors but before shareholders, who usually lose all of their investment.

The securities pay lower coupons than regular unsecured bonds – a big source of their appeal to borrowers – but can more than make up for that difference if the company’s shares climb high enough. The problem is, many investors don’t know much about convertible bonds or how to successfully invest in them. We can solve that problem for you.

There are risks, of course: Though convertibles tend to swing less wildly than stocks, they are still volatile. At this point in 2018, convertible bonds had returned nearly 11% for the year. Yet by year-end, those returns had disappeared. That’s why you need a seasoned professional to guide you. We’ve got one.

I wish more of our clients had the added diversification of convertible bonds in their portfolios, especially when this long bull market in stocks plays out. For more information on convertible bonds and the one manager we recommend, call us at 800-348-3601.

Personal Note: Hip Replacement Surgery Next Week

This time next week (October 15), I will undergo hip replacement surgery. I’ve never been a patient in a hospital before, nor have I ever been anesthetized. So, needless to say, I am more than a little nervous. However, my left hip has really been bothering me this year, and I’m ready for the surgery.

That means, of course, I’ll have to write next week’s E-Letter early, and my team will send it to you as usual next Tuesday. If you have any advice or tips for me on hip replacement surgery, I’m all ears.   

Best regards,

Gary D. Halbert

SPECIAL ARTICLES

September Unemployment Rate Falls to 50-Year Low

Market see 90% Chance of  a Fed Rate Cut in October

Gary's Between the Lines Blog: Health Insurance Costs Soar to Record $20,000 Per Year

Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc., a Registered Investment Adviser under the Investment Advisers Act of 1940. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of the named author and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific advice. Readers are urged to check with their financial counselors before making any decisions. This does not constitute an offer of sale of any securities. Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have their own money in markets or programs mentioned herein. Past results are not necessarily indicative of future results. All investments have a risk of loss. Be sure to read all offering materials and disclosures before making a decision to invest. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.