Strong Economy Scares Investors, The Tour is Back

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July 9, 2023

HIRING SLOWS IN JUNE…MAYBE: According to the U.S. Bureau of Labor Statistics (BLS), the U.S. economy added a net 209,000 new jobs last month. That is a healthy gain, but it is the lowest in a while. In the first half of the year, the average was 278,000, and in 2022, the average was 400,000. (See the graph below). The unemployment rate did fall from 3.7% to 3.6%. Average hourly earnings rose by 4.4% from a year earlier (rose 0.4% for the month of June), about the same rate as the prior two months.

BUT, hold on. The day before this official government number came out, ADP reported that the private sector added 497,000 jobs in June, way above expectations and way above what the BLS report is telling us.

The BLS report is based on polling data. It surveys approximately 122,000 businesses and government agencies representing about 666,000 worksites throughout the U.S. The ADP report is based on actual payroll transactions at companies employing more than 25 million U.S. workers.

Recent minutes reported from Fed meetings make it clear that it pays attention to the ADP numbers, so when the very high 497,000 number came out on Thursday, followed by the BLS report that showed robust wage increases, it shook up the markets due to worries about future rate increases.

U.S. SERVICES ECONOMY GROWING: According to the Institute for Supply Management, services activity rose in June from May. According to its Index, anything above 50 represents growth. The Index number went from 50.3 to 53.9, a fairly big jump.

THE MARKETS GO DOWN WHEN THE U.S. ECONOMY SHOWS ITS RESILIENCE: In a short trading week (3.5 days), markets moved down a bit due mostly to worries that the U.S. economy is doing so well that the Fed will most certainly raise rates at their next meeting. What most people seem to want to know is, “Are we going to have a recession or not?” The answer, of course, is ‘yes,’ we will have a recession, but will it be in three months or six years? We are going to have to stay in suspense for awhile, as are investors.

LONGER-TERM PERFORMANCE: Below are the annualized three-year and five-year numbers for these same indices.

SALES OF BIG TRUCKS ARE WAY UP FROM LAST YEAR: According to the U.S. Bureau of Economic Analysis, heavy truck sales were at 547,000 in June. That is down a bit from May (566,000), but still running at about 15% higher than one year ago.

CARS DOING WELL ALSO: Sales of U.S. light vehicles in June were up 4.2% from May and were 18% higher than a year ago.

CHINA’S ECONOMIC STRUGGLES CONTINUE: For the third straight month, China’s manufacturing sector has contracted. Employment in that sector decreased for the fourth month in a row. The global trend now is for manufacturers to diversify their supply chains, meaning they wish to be less dependent on China. That trend will likely fuel more contraction of China’s manufacturing sector. The unemployment problem in China is approaching crisis stage. For workers aged 16-24, the unemployment rate just hit a new record of 20.8%.

DE-DOLLARIZATION: A “reserve currency” is the currency used for a majority of the world’s international transactions. Historically, these were currencies of various European powers, and these empires often backed their currencies with gold or other metals. Before World War II, Britain’s currency struggled to maintain its status as the U.S. was rising. The Breton Woods Agreement of 1944 formally made the U.S. dollar the world’s reserve currency. In 1971, President Nixon abandoned the gold standard, and from that point on, the dollar has maintained its status as world’s reserve currency backed only by the full faith and credit of the U.S. government.

For the 20 years prior to the pandemic, the dollar accounted for 96% of international trade transactions in the Americas, 74% in Asia and 79% in the rest of the world. Banks used dollars for 60% of their nondomestic deposits and loans. On foreign exchange markets, the dollar is currently on one side of about 90% of all transactions. As a result of a number of recent phenomena, the dollar has been receiving some challenges to its status including:

  • Sanctions on Russia, scaring other countries because of the U.S.’ ability to freeze funds,
  • Inflation is weakening the standing of the dollar on the international stage.
  • Regional banking crisis.

Countries such as China (of course), India and Brazil have been calling for moves to trade directly with one another in their own currencies.

Currently, no other country or region has currency strong enough to make a run at the dollar on its own, at least not in the short term. Some economists have proposed a financial system backed by either precious metals or cryptocurrency. In the near term, any weakening of the U.S. dollar as reserve currency is likely to occur on a country-by-country basis as they figure out ways to trade without the involvement of the U.S. dollar. This may occur, but it will take many years barring more serious geopolitical activities.

If indeed it does happen, and the dollar begins to lose its reserve currency status, it would affect overall borrowing costs in the U.S. and hurt our stock market values. The U.S. government’s ability to run large international trade and government spending deficits would diminish, requiring major belt tightening (smaller government and/or higher taxes). This of course is a reason why you should have diversification in your portfolio that includes geographic diversification (outside the U.S.) and perhaps in alternatives such as real estate and/or funds that can hold precious metals.

Again, this is not likely a quick event, but a slow-moving train. But being diversified for both the short and long term makes sense.

THE TOUR IS BACK!: For anyone who has read this email over the year, you know I am enthralled with the Tour de France. The rivalry between Pogacar and Vingegaard has already been epic in just the first week in this year’s Tour. With DVR, it is so much easier to watch, and I am loving every mile of it. But, you may ask, if you love the Tour so much, why are you not an avid cyclist? I do enjoy riding a bike, but I’m not on the road a lot. I’m just not sure enough of myself on a bike, and, incidentally, the state in which live is the most dangerous state to be on a bicycle in the U.S.A. (according to a recent U.S. News and World Report study). It is also in the top five for most dangerous for pedestrians, so I guess I better be more careful on my runs.

CELEBRATING A BLESSING: Deb and I celebrated yet another anniversary this week. Everyone who knows us realizes just how fortunate I am to have found someone who complements me so well, who makes my daily life joyful, and who is a great teammate in getting through the challenges of life. Some of you know that I proposed 16 days after our first date. I don’t recommend that generally, but in my case it was the right decision for sure. One thing that solidified it for me back then was a co-worker. At the time I was working a temporary job where I was doing some window glazing on an old building. I was asking God for guidance on whether or not to pop the question. My co-worker was quite a bit older than me. As it turned out, he was a World War II vet. Without telling him what I was thinking about, he told me his story of meeting his now wife (of many decades) on a Friday before shipping out overseas at the outset of the war. They married on Sunday, and had been happily married those many years. All of a sudden 16 days seemed like a long time. It worked out.

Have a great week!

Our mission is to help you see the objective, find the path, and navigate past the obstacles to a more prosperous future.

Douglas R. MacGray, J.D., C.F.P. ®
Stonecrop Wealth Advisors, LLC

Direct | Cell | Fax
(610) 628 4545

“Life is like riding a bicycle. In order to keep your balance, you must keep moving.” Albert Einstein

“I heard the wheels being called ‘the whirling wheels.'” Ezekiel 10:13



(c) 2023 A.D., Stonecrop Wealth Advisors, LLC, All Rights Reserved

*S&P 500: This is a measure of the performance of the 500 largest companies in the United States, and it a common index to track the performance of U.S. equity markets, especially the large cap markets.
*MSCI All Country World Index X US: This is a broad measure of the performance of worldwide equity markets excluding the United States.
*Bloomberg U.S. Aggregate: This is a measure of the U.S. bond markets.

Investment advisory services offered through Stonecrop Wealth Advisors, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.




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    Doug MacGray

  • DATE

    July 10, 2023


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