The student body's got a bad reputation (oh yeah, oh yeah)

What they need is adult education

You go back to school, it's a bad situation (oh yeah, oh yeah)

What you want is an adult

Education

Oh yeah

-Daryl Hall & John Oates

Whoa, could it be that Powell has learned his lesson, and Wall Street has stopped with the temper tantrums?

What Happened?

The Federal Reserve cut rates as everyone anticipated. They seemed comfortable enough with their handiwork to express it in a shift in language that served as a self-congratulatory victory lap, suggesting their work here is done. 

At least for the moment, the glide path is set, so the main job at the Fed will be assessing conditions on the ground rather than acting to sustain the expansion.

Old Language

As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

New Language

The Committee will continue to monitor the implications of incoming information for the economic outlook as it assesses the appropriate path of the target range for the federal funds rate.

Having Cake & Eating it too

I thought it was interesting that the stock market didn’t decline as a knee-jerk reaction to the punch bowl being removed. Instead, the market drifted higher, and during the question & answer period, Powell was pressed on this being the end of accommodation.

Each time, he was sure to go back to the talking points- a mix of “mission accomplished” coupled with “we got your back.”

Rates will stay at current levels if these measures hold up:

• Moderate economic growth
• Strong labor market
• Inflation near 2% 

However, Powell made sure to clearly say “Policy is not on a pre-set course.” He seemed to take credit that Fed policy has had numerous positive impacts on Main Street:

• Strong household spending
• Consumers buying durable goods
• Stronger housing
• Strong retail sales
• High consumer confidence

Labor Market

Powell mentioned the labor force on the same day the October ADP jobs reported 125,000, which came in better than expected, but there were several worrisome yellow flags. September was revised down 42,000 to 93,000 and food-producing jobs (dirty fingernails) were hammered.

In October, 13,000 goods-producing jobs were lost and evenly distributed among mining, construction, and manufacturing. After a strong start out of the gate, there has been a decrease in these dirty fingernail stocks in five of the last six months.

• Jan:   87
• Feb:   39
• Mar:     7
• Apr:    45
• May:  -22
• Jun:     -7
• Jul:      -1
• Aug:      8
• Sep:     -5
• Oct:     -13

Fall Out from Full Employment: NAIRU

Non-Accelerating Inflation Rate of Unemployment (NAIRU) is the metric used by economists to assess whether the country is at full employment.

It measures the historical relationship between the unemployment rate and changes in the pace of inflation. When the unemployment rate is below that number, the economy is considered to be in full employment.

Under these circumstances, finding workers is difficult, wages rise, and inflation eventually increases as well.  The Congressional Budget Office (CBO) establishes the NAIRU, which currently stands at 4.6%.  Considering the current unemployment rate is 3.5%, the nation is technically deep into the full employment phase.

Small Employers Struggle

When hiring becomes difficult for big business, you can bet it becomes impossible for small businesses, and that’s been playing out in recent months.

How Bad is It?

I took comments from the Kansas City and Dallas Fed Manufacturing reports to share the frustrations of finding qualified workers, which are folks that show up to work on time and possess other so-called soft skills.

Responses to Kansas City Federal Manufacturing Survey

“Business is good, having trouble finding people.”

“Still looking for qualified workers that show up and stay a full day.”

“Because of the shortage with labor we have been working more overtime.”

Dallas Fed Manufacturing Survey (August)

Currently trying to hire?                                                                                                                69.8

Trying to fill low-skill positions…problems finding qualified workers?                        77.9

Main reasons you are having difficulty finding qualified low-skill workers?

• Lack of available applicants/no applicants                                                              72.3
• Inability to pass drug test and/or background check                                          47.9
• Lack of workplace competencies (soft skills)                                                         43.7
• Looking for more pay than is offered                                                                      40.3
• Lack of technical competencies (hard skills)                                                          35.3
• Lack of experience                                                                                                          26.1

It’s against this backdrop that small businesses are losing workers and struggling to find replacements.  The ADP report saw the following:

Portfolio Approach

I gave up the ghost and took the hit on Molina Healthcare (MOH). We are considering lowering the weighting in Health Care (XLV), where there is value, but the risk-reward ratio suggests it’s too early.

Earnings After the Close

Beats & Rallies:

• Apple (AAPL)
• Facebook (FB)
• Starbucks (SBUX)
• Coupa Software (COUP)
• SunPower Corp (SPWR)
• Habit Restaurants (HABT)
• Cirrus Logic (CRUS)
• Lyft (LYFT)

Misses & Swoons:

• Etsy Inc (ETSY)
• Western Digital (WDC)
• Twilio Inc (TWLO)

Today's Session

The futures were under pressure, but improved, after a Bloomberg article suggested that China doubts a deal beyond phase one is possible with President Trump.  The markets opened down, but not significantly.  

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