After Friday’s job report there seems to be a fair amount of consensus regarding the health of the US economy and how close we are to full employment. Prognosticators have commented that the 4.4% number posted last week probably won’t see significant improvement going forward. Hard data and soft data are sending mixed signals. The Fed is watching closely. As our economy grows so does the need for workers (technology can replace people only so fast). If employment gains begin to slow but the economy doesn’t, then wages will increase. Historically, this creates inflationary pressures causing rates to rise.
I stated in the past that the economy and markets in particular do surprisingly well when inflation is between 0 and 4%. Today, we reside in this sweet spot. But, keep in mind real wage pressure has been contained and things change quickly. Consumers are more confident than in the recent past, negotiations in Washington have yet to produce anything more meaningful than promises, and corporate coffers are full of cash yet to be deployed. The fuel for inflation is present, only needing a catalyst.
Predicting when all of this happens is foolish, but preparation is needed. Also required is an investment rationale that helps protect your clients and their portfolios. Wealth accumulation is a noble objective, but is too simply stated. Conserving client assets in down markets, providing real growth versus nominal growth, and keeping clients fully invested when warranted provide clients with a high degree of confidence. Transparency, objectivity, and efficiency give clients a reason to stay.
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