• / Free eNewsletters & Magazine
  • / My Account
Home>Market Commentary

Related Content

  1. Videos
  2. Articles
  1. Unearthing Value in Bonds

    Panel discussion: TCW's Laird Landmann, Loomis Sayles' Elaine Stokes, and Gibson Smith of Janus explore potential areas of opportunity in the credit markets, the prospect of a liquidity crisis, and more.

  2. Finding Value in a Challenging Market Environment

    In this special one-hour presentation, Morningstar experts share their takes on how investors can navigate a world with slightly overvalued stocks, an uncertain interest-rate environment, and a slow-growing economy.

  3. Sharpen Your Portfolio Plan for 2014 and Beyond

    Roundtable Report: At the outset of 2014, Morningstar strategists dig into the market's current valuation and expected return, seek out high-quality U.S. and foreign stock opportunities, size up the role of cash today, assess the Fed's impact on the market, and reveal the best ways to fight inflation.

  4. U.S. Economy: Little Capacity for Long-Term Growth

    The U.S. economy is bouncing back from first-quarter headwinds, but in the long run it can't grow more than about 1.5% per year, says David Kelly, chief global strategist for J.P. Morgan Funds.

Market Commentary


Week in Review
Markets rallied last week as some of the geopolitical hot spots calmed slightly, and Janet Yellen’s speech in Jackson Hole (see the following page) contained no major surprises. The S&P 500 rose nearly 2% over the week and is now 9% higher on the year, including dividends. Technology stocks were the top gainers for the week, up over 2%.

Over the weekend, it was announced that Burger King was considering an acquisition of Tim Hortons Inc. The biggest concern to customers will be whose coffee will survive the acquisition.

Markets continue to focus on anticipating how the Federal Reserve will react to changes in the economy, inflation, and employment. In anticipation of the Labor Day holiday, this week’s summaries include an extra focus on the challenging interaction between investing and labor.

Setting Monetary Policy is Tough
The big event last week was Federal Reserve Chairwoman Janet Yellen’s speech at the Jackson Hole conference on monetary policy. In the speech, she pointed out the challenges she and the rest of the Federal Reserve face in deciding when to start raising interest rates. Instead of summarizing the speech, below are some of the key sentences from the speech, expressing a wide range of uncertainty.

  • As the recovery progresses, assessments of the degree of remaining slack in the labor market need to become more nuanced because of considerable uncertainty about the level of employment consistent with the Federal Reserve’s dual mandate.
  • The assessment of labor market slack is rarely simple and has been especially challenging recently. Estimates of slack necessitate difficult judgments about the magnitudes of the cyclical and structural influences affecting labor market variables, including labor force participation, the extent of part-time employment for economic reasons, and labor market flows, such as the pace of hires and quits.
  • For policymakers, the key question is: What portion of the decline in labor force participation reflects structural shifts and what portion reflects cyclical weakness in the labor market?

Later in the speech, Ms. Yellen posits that wage slack may be immaterial and that rates should stay low until inflation moves; however, she then took the opposite side, saying wage changes may pick up abruptly as firms raise wages to keep employees from seeking jobs elsewhere.

What should investors take away from the speech? The Federal Reserve is flying a little blind. What is clear though, is that the 2008 downturn had more than temporary effects. The economy also continues to be shaped by forces beyond the economic slowdown. Investors should continue to be warily optimistic about the Fed’s plans. They should also prepare for bigger swings in the market as economic data points may move markets more than expected.

Happy Labor Day?
An interesting facet of this recovery has been the declining rate of employee compensation as part of GDP. Since the early 1990s corporate sector margins have expanded from around 27% to over 34%. Wages have declined by roughly the same amount, resulting in a transfer of benefits from employees to corporations and investors. Employees continue to get more productive, and the compensation they receive is increasing, but take home pay is growing at a much slower rate than output.

©2017 Morningstar Advisor. All right reserved.