Is Punctuation No Longer Relevant?

No one ever said the economy, and by extension the stock market, was easy to read.  With so much conflicting data and so many variables, it is often difficult for even a professional to fully understand exactly what is happening.  For some time now, the data has indicated that the economy is slowing.  Not the precipitous type of slowing that might cause fear, but a gradual slowing as would be consistent with the end of a strong business cycle.  After all, the length of our current economic expansion has exceeded ten years and is the longest in post-WWII U.S. history.  While I am not alarmed by this gradual slowdown, I am less sanguine because of the many uncertainties that persist. 

This week’s economic data clearly reflects slowing growth.  The ISM services and manufacturing indexes both fell short of consensus, with respondents citing trade as a reason for the economic deceleration.  Looking ahead, the two big questions are: Will this motivate the Federal Reserve to cut interest rates further?  Is this just the economy pausing to take a breath?  To answer that rhetorical question, traders are now pricing in a 92.5% probability of a rate cut at the next Fed meeting later this month, and a 50% chance of another cut in December.  While it isn’t clear to me that a series of rate cuts will affect the economy at this point in the business cycle, the herd believes otherwise.  It is my belief that the Fed may be “pushing on a string,” which occurs when central banks try to enact loose monetary policy when there is already slack in the economy, resulting in little to no results.

Perhaps the strongest argument for further interest rate cuts is that inflation remains low.  Coupled with a Goldilocks September jobs report released this week, it gives the Fed room to cut rates further.  Moderate jobs growth of 136,000 in September and an unemployment rate falling to 3.5%, the lowest in the past fifty-years, suggests there is room for further action.  However, the mechanism by which rate cuts stimulate an economy is in the borrowing and subsequent spending.  Individuals may borrow to buy a house or perhaps a larger home.  Corporations may borrow to build another manufacturing facility or hire additional workers.  However, CEO's polled overwhelmingly cite business uncertainty as the number one reason for a lack of investment in the near-term.  On the flip side, investors and retirees are hurt by ever lower interest rates which have become the “new norm.”  It is likely the Fed will continue to lower rates.  I'm just not sure it will have as much of an impact going forward.

Last week I mentioned a rather strange situation in the repurchase markets (specifically with overnight lending).  You might recall I said the Fed had intervened every day for the past couple of weeks, acting as an intermediary and in many cases the lender of last resort to banks and corporations that need to borrow money overnight.  The last time this happened was at the start of the financial crisis in 2008 when liquidity dried up and Lehman Brothers and Bear Stearns went under because no one would lend to them.  What was downplayed as a temporary operation by the Fed, has once more been extended.  Instead of ending in mid-October, it is now extended into the first part of November.  Also of interest, some analysts and rival banks are pointing the finger at JP Morgan as the cause of the current liquidity crunch.  Publicly-filed data shows JP Morgan, who has a $2.7 trillion balance sheet, reduced the cash it has on deposit at the Federal Reserve by $158 billion through the end of June (a 57% decline) in response to interest rate trends and post-crisis banking regulations.  I think we’re getting a little closer to an answer, but I’m not sure we’re fully there yet.

In closing, I turn to an article one of our clients posted on Facebook today (I hope she doesn’t mind).  No doubt you have received a text message from someone, perhaps younger than yourself, that excludes all punctuation and perhaps is filled with acronyms?  Before you start grumbling, much like I do when I receive these types of texts, you might want to know that new research suggests proper punctuation in text messages conveys negativity.  Texts which include a period are viewed as less sincere than texts without a period.  I won’t go into the various reason researchers believe this is that case.  If you want to read more about this you can find the article here.  As someone who still agonizes over putting one space or two spaces after a period, you can imagine on what side of the argument I fall.  While disheartening to me personally, I wonder what communication will evolve to look like in another twenty-five years.  Perhaps we’ll be texting with nothing but acronyms and emojis?  Now you know.

Bruce J. Mason, MBA
Senior Vice President | Harvest Financial Advisors, LLC | 513.779.3030 | 800.361.0329