I secretly dislike Hallowe’en. (I’m also the last person in America who puts in that apostrophe.) It’s a lot of fuss and prep to then have to argue with my kids about how much candy they can eat at once. This year, however, it was a welcome distraction from the ongoing torrent of unpleasant news, including the looming threat of possibly-not-so-transitory inflation. And the Snickers bars were tasty.
After a piping hot 6.7% annual rate of growth in the second quarter, our economy slowed down to 2.0%, which is more sustainable and normal for the US. Recall this is the increase in gross domestic product, meaning, everything produced on U.S. territory. This is a “real” or inflation adjusted rate, so we produced 2% more widgets, not the same number of widgets for a 2% higher price.
If you take some microeconomics classes, you might hear professors talk about “widgets” as a sort of generic good in their examples. For fun I searched it to see if there was ever a device or product called a widget, and all my results had to do with software. So I opened my two decade old print copy of the Oxford American Dictionary: no widget. It seems we actually produce widgets currently, but as to whether we did when I was drawing supply and demand curves in Minnesota, pre-Internet? I’m still in the dark.
At any rate, this underscores the point I was hoping to make about economic production – what drives changes. Once I have my widget factory running around the clock seven days a week, the only way I can produce more widgets is to buy another widget press, or perhaps build or acquire another factory. Then I can produce a lot more, all at once. Increases in GDP can also originate from increased worker productivity – making more widgets with the same number of workers and factories. Perhaps a new compensation scheme motivated workers to move faster, or a better maintenance schedule made the machines more productive. These tend to be smaller, incremental increases, rather than big leaps. If this happens in many industries at the same time, we may see a leap in economic growth, like when the internet came into broad use, or assembly lines were adopted.
Recent changes in economic production have been almost entirely driven by the COVID pandemic waxing and waning, rather than innovation, which explains the rapid whipsaw effect we are seeing – we don’t generally all build factories in the same quarter.
|GDP||+2.0% annualized rate in the 3rd quarter||Gross Domestic Product||bea.gov|
|Unemployment||-0.2% in October to 4.6%||Totally unemployed “Active Participants”||bls.gov|
+0.4% seasonally adjusted in September
+5.4% past 12 months
|Change in price of a particular set of goods and services||bls.gov|
Stocks in the United States regained their September losses and then some, while other developed-market stocks didn’t quite make up the prior month’s decline. US Bond markets were subdued.
In discussing monthly performance in securities markets, I am straddling a line between staying abreast of information that is relevant to our practice, and walking my talk regarding our long-term investment focus. This strikes me a bit like watching our kids learn their chosen sports – I want to know what happened in that last fencing bout or grappling practice, but the real point is to keep my kids moving and provide them with an activity they can enjoy for the rest of their lives. Focusing too much on one competition is counter-productive, but they won’t progress if they don’t review what is happening now.
Ultimately, I hope to accomplish both detailed and big-picture investment goals for our clients, without too many twisted ankles in between. Research has shown repeatedly that appropriate diversification and asset allocation, staying the course, and keeping expenses low are the most effective strategies for these goals. If reading these comments fails to soothe any impulses to leap out of the markets when the ride gets rough, by all means, please ignore them. Or perhaps a “fun size” Snickers will do the trick? But I’ve eaten all ours, you’ll have to find another source.
|S&P 500||+6.9% in October||US Large-cap stocks||wsj.com|
|MSCI EAFE||+2.5% in October||Not-US developed market large-cap stocks||msci.com|
|Barclay’s Aggregate Bond Index||-0.03% in October||US investment-grade bonds||performance. morningstar.com|
|Ten-year Treasury Yield||Rose 0.07 percentage points to 1.56% in October||Interest earned on a US ten-year Treasury note||wsj.com|
We hope these newsletters make news about markets and the economy easier to digest. If there is another way we can be of help to you, do let us know. We would love to hear from you!