Our Insights

What a Goldilocks Jobs Report Means for the Fed and Investors

There’s a common saying among investors that markets take the stairs up and the elevator down. This is because the long-term trends that drive markets higher tend to be slow moving and compound over time, whereas the events that create short-term panic tend to be sudden and unexpected. At the same time, history shows that even new market lows tend to be higher than previous peaks. In other words, markets often take the stairs up several floors before riding the elevator down one or two levels. For our investors, understanding this dynamic in the current environment is critical to staying focused on important financial goals.

Bond market volatility has been elevated

A more technical way to frame this dynamic involves the distinction between returns and volatility. Returns are simply the gains that investors experience in their portfolios which, ideally, should be measured over timeframes that capture the growth in asset prices across important phases of the market and business cycle.

In contrast, volatility measures how much prices swing over days, weeks, or months. These swings often reflect the gap between reality and expectations for investors. Given that expectations can shift wildly in both directions, it should not be surprising that market prices fluctuate as much as they do. However, these fluctuations do tend to even out over time. In the

end, what matters more to us is the final outcome and less the path it took to get there.

The past few weeks prove this point. The recent market correction only pulled the S&P 500 back to levels last reached in May before then spurring the strongest rally of the year during which the market gained 5.9%. This is because investors feared the worst when rates jumped in October before new data showed that the backdrop is more balanced than expected – one in which inflation is slowing and economic growth is steady but decelerating enough to appease Fed policymakers. Markets often need time to adjust to these dynamics which naturally causes asset prices to swing.

While we focus on stock market volatility, using measures such as the VIX index, the volatility of interest rates and the bond market has been far more severe since the beginning of 2022. The 10year Treasury yield, for instance, has made multiple roundtrips within a range of 4.5% to 5% since September. The accompanying chart shows the MOVE index of bond market volatility which has been elevated for over a year and a half. Fortunately, recent economic data have led interest rates to fall once again, calming markets.

The job market is showing signs of softening

One reason for this is the recent jobs report for October which showed that hiring slowed. The economy added 150,000 new jobs over the month which is less than the 180,000 that economists had expected. This was also a sharp decline from September’s 297,000 new jobs, due in no small part to a drop in manufacturing employment due to factory strikes. Unemployment increased slightly from 3.8% to 3.9% while the labor force participation rate, which measures the percentage of the working age population either working or actively looking for work, declined slightly to 62.7%.

While these figures represent a slowdown in the job market in October, it’s important to understand how they fit into our outlook. First, we

would never make decisions based on only a single month’s numbers, whether it’s the jobs report, the Consumer Price Index, or GDP. Not only are these figures subject to change but they are also only estimates with wide margins of error.

Second, and more importantly, we have been anticipating a slowdown in the labor market in response to tighter monetary policy by the Fed. The softening of an otherwise strong labor market coupled with improvements in inflation represent the Goldilocks situation we have been hoping for. A “soft landing” means that the Fed can pause its rate hikes and, as price pressures decline, possibly consider cutting rates over the next couple of years. Unlike in 2022 when the Fed had to raise rates rapidly, the possible end of the tightening cycle will likely create more stability and certainty for investors. In the ideal scenario, the gap between reality and expectations could shrink as the macroeconomic shocks of the past few years continue to fade.

Markets do not expect the Fed to raise rates again

Holding rates steady is precisely what the Fed did again at its November meeting. The Fed recognized that there have been important improvements to the inflation story while the overall economy has been healthier than expected. A softer labor market reduces the risk that inflation could surge unexpectedly, and unemployment is approaching the Fed’s 4% forecast for the end of the year. The Fed’s ideal situation is that interest rates remain high across the yield curve to keep the economy in check without the need for additional rate hikes.

This is not to say that market volatility is behind us – it never is, after all. On the contrary, it highlights that markets and investors often get ahead of themselves whether it’s

due to inflation, the Fed, financial stability in China, Washington politics, or dozens of other factors. In all of these cases, it’s more important for us to understand the bigger picture than try to react to every new headline.

The bottom line? We will continue to maintain a long-term perspective rooted in economic and market trends. Doing so is still the best way to increase the odds of achieving financial goals. In addition, we feel it is time to start adding duration to our fixed income allocation.

Dover Advisors, LLC (“Dover”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Dover and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://doveradvisors.com/.

Copyright (c) 2023 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security–including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

Ned Abbe

Co-CIO

Jess Ellington

Co-CIO

Important Information:

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Risk associated with equity investing include stock values which may fluctuate in response to the activities of individual companies and general market and economic conditions.

Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of issuer default; issuer credit risk; liquidity risk; and inflation risk.

Our Insights

What a Goldilocks Jobs Report Means for the Fed and Investors

Bond market volatility has been elevated

The job market is showing signs of softening

Markets do not expect the Fed to raise rates again

Ned Abbe

Co-CIO

Jess Ellington

Co-CIO

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