In The News...
I want to briefly touch on something I didn't have a chance to discuss last week: Jobs.
The latest report for April showed unemployment fell to 4.4%. That is the lowest in 10 years, since March 2007. What does it mean and is it significant?
It depends. The problem is that you can use a variety of jobs-related statistics to prove your argument, depending whether you think the job market is strong or weak. It is complicated because while the notion of having a job is straightforward (a lower unemployment rate seems obviously better), the context around the entire job market is not. Point being, it is not as simple as saying things are rosy because the official unemployment rate is the lowest in a decade.
A negative take: One big difference between today and 2007 lies in the participation rate. This is the ratio of working-age Americans either employed or actively-looking-for-work compared to the total working-age population. The following chart shows that while unemployment (BLUE line, right axis) is back at lows seen 10 and 20 years ago, labor participation (RED line, left axis) has fallen some -4% since 2007 and is currently at 63%. Take a look...
A -4% decline in participation may not sound like a lot, but when you consider there are 254 million working-age citizens in the U.S., 4% in either direction is significant.
A positive take: A stat that gets thrown around a lot is the number of people not in the labor force, currently 94 million. No doubt that number is high, but context is needed because it stems from the total pool of working-age Americans, which includes retirees. Baby Boomers (those born between 1946 and 1964) comprise nearly one-third of the U.S. population and are gradually retiring with each passing year. Those retirees are counted in the denominator of that 63% participation ratio. There are other caveats that may help explain the 94 million who "aren't working", but that is a big one.
The numbers that matter: Just as important to the growth in jobs is the growth in pay, shown below. Average hourly pay (BLUE line) is up +2.5% year-over-year, which is just a shade above the 2.2% inflation rate (RED line) that reflects the average cost increase of the things we buy every day.
Most telling from above is how wages have only inched higher despite the stark rise in the cost of goods and services. Look no further than the housing market to feel this impact. In a hot real estate market such as Seattle, it is difficult for many prospective homebuyers to keep pace with housing prices without wage increases. (I don't mean to oversimplify what it takes to buy a home or the savings process required. I am merely using a situational example to illustrate my theoretical point that wage growth and inflation are just as important as the number of people hired.)
All in all, the April jobs report was positive. But before praising or refuting the conditions of the labor market, realize that a lot of stats matter aside from the 4.4% headline figure that you see.
In The Market...
The S&P 500 fell -0.3% this past week. Let's look under the hood...
Stocks: Seven of the 10 equity sectors were down on the week. Technology led the way, as the exchange-traded fund "XLK" is at all-time highs, eclipsing the previous mark set in March 2000 (more on this below). On the flip side, Financials, Real Estate and Materials were each down more than -1.0%. For those who own the Real Estate fund (VNQ), I feel we are nearing a point where Real Estate could rebound in the near future, coming off of consecutive weekly declines.
Bonds: A bounce-back week for the bond market, which may be getting close to breaking out. Investment-grade bonds were the best of the bunch, which we own in most accounts. If stocks were to slide further, or if the S&P 500 has trouble getting over 2,400, that could mean good news for bonds.
In Our Opinion...
I mentioned that technology is breaking out to all-time highs. Here is a look at where the price of XLK stands in relation to the past 20 years:
Back in February, when tech was some 6% below its current price, I was concerned about the rally stalling out near that previous record high from March 2000. Now that it has pushed above it, this investment looks promising.
One concern I do have is that the relative strength reading (RSI) is sitting up around 80.0 on this monthly chart. That is well above the "overbought" level of 70.0 that investors use as a predictor that a sell-off is near. There is no tried-and-true approach when comparing price with RSI, but we do so because RSI helps measure buying and selling momentum, which can help provide clues to potential trend changes.
I tend to think that a RSI reading above 70.0 is actually bullish, particularly if similar, past instances turned out well in the weeks that followed. Will this be the case here? I tend to think the rally has some legs in it. As a result, I have my eye on tech again as a potential buy.
In Our Portfolios...
Stocks: No changes this week.
Bonds: No changes this week.
Q&A / Financial Planning...
What is the difference between stock options and restricted stock?
Many of you benefit from owning stock options or restricted stock (or both), as your employer grants you company shares as an employee incentive. It is easy to overlook the details that differentiate options from restricted shares, so here is a high-level comparison of the two:
- The right to buy shares at a predetermined price ("exercise price"). Not an obligation to buy.
- Your reward is if the share price exceeds the exercise price on-or-after the vesting date. If so, your stock options are profitable.
- Your risk is if the share price is lower than the exercise price on the vesting date. In this case, you earn nothing but lose nothing.
- If you leave your employer and own vested shares that you have not purchased, you typically have 90 days to buy them post-departure.
- Taxes vary depending on whether the shares are incentive (ISO) or non-incentive (non-ISO) stock options.
- Shares are simply given to you by your employer (no option to buy).
- You must wait for the vesting date to actually own the shares (if you leave your employer prior to vesting, bye-bye shares!).
- The value of the shares are taxed as ordinary income for the year in which the shares vest.
- (Number of shares that vest) x (Share price on the vesting date) = Initial amount you are taxed on
- If you hold the shares past the vesting date, the difference between the eventual sale price and the price on the vesting date is taxed as either a long-term or short-term capital gain (unless you elected 83b tax treatment).
What's New With Us...
If you have not received the account transfer request to move your account(s) from Scottrade to TD Ameritrade, you will over the weekend. Please be on the lookout for that form, which we would appreciate if you could e-sign once you get it. Call me if you have any questions.
Have a great weekend!
Brian E Betz, CFP®