Although the headline numbers on last week’s job report were below expectations and tariffs may create further drag, the labor market remains quite strong. One of the metrics that I have been watching has been the continued decline in unemployment rates among groups with historically higher unemployment. While all jobs and compensation are not equal, low unemployment rates are an encouraging sign.
One way to look at the breadth of the labor market’s health is to look at unemployment rates by education level (see below). As the bottom panel shows, the difference in unemployment rates between those with a bachelor degree and those with a high school diploma is historically low.
Similarly, we can slice the data to view unemployment rates by race. Currently, the gap between black and white unemployment rates is also historically low.
Another metric worth following is the U6 unemployment rate, which includes the official headline U3 unemployment rate plus those who are underemployed (discouraged workers or those marginally attached to the labor force, as well those working part-time for economic reasons).
While low unemployment benefits workers today, it also provides valuable training and experience that will benefit those workers, their future employers, and the overall economy for years to come and beyond the current cycle.
I visited Seattle twice last month and saw the boom that everyone’s been talking about. Seattle is home to both the most competitive neighborhoods and the most construction cranes in the US (see below).
To left of my photo above, Amazon has raised multiple skyscrapers and many more are going up between where I took the photo and the lake. How many cranes can you spot?
Negative screening (or exclusionary screening) is the process of screening specific assets out of an investment universe or strategy. Implementing these screens is called divesting and results in divestment.
Divesting does connotate excluding something that one would otherwise own. For instance, a large-cap fund might not own tobacco stocks or small-cap stocks. Intentionally screening out tobacco stocks would be considered divestment, because it is something the fund would own otherwise. However, the fund would not be considered to have divested from small-cap stocks though, as they fall outside a large-cap fund’s investment universe. In other words, divestment is the intentional act of excluding assets that one would otherwise own.
There are purely economic reasons to divest from assets, but I will focus on values-based divestment here. Values-based reasons to exclude assets may include not wanting to be associated with or derive any benefit from specific activities/products/services. Values-based screening has ancient roots as various religions have forbidden debt with very high interest (or any interest at all) for thousands of years (see here). More recent examples include the Quakers divesting from the Atlantic slave trade or US investors divesting from Apartheid-era South African assets. Today, hot topics include tobacco, weapons, and fossil fuels.
It should be noted that there are arguments that even non-economic considerations can also be economic ones. For instance, as energy consumption shifts towards renewable energy, the returns from fossil fuels may suffer. A mass shooting may bring unwanted publicity and legislation upon a firearm manufacturer. These are cases where values issues may become value issues.
There are a wide variety of objectives and approaches to divestment, each with a unique set of benefits and drawbacks. Exploring all of the applications of divestment is beyond the scope of a blog post, but we will look at some common examples in the coming weeks.
Former Fed Chair Ben Bernanke recently joined the chorus of voices casting doubt on the predictive ability of the yield curve. Yet, others such as Minneapolis Fed President Neel Kashkari, have been quite vocal about the risks of inverting the yield curve.
Whatever your views on Bernanke, Kashkari, or inverted yield curves, it would be wise to understand that the top policymakers disagree on the topic. Nobody knows how predictive the yield curve still is. Only time will tell. In the meantime, we should approach the debate with humility and understand the opposing lines of logic thoroughly.
As the yield curve continues to flatten, there has been increased focus on the potential for “inversion” which means that short-term rates are higher than long-term rates. Central bankers have begun mentioning it, we have seen an increase in media mentions, and we have even received a few questions from clients. Below is a chart of the difference between the 10-year US Treasury yield and the 2-year US Treasury yield. The 10-year yield is usually higher than the 2-year yield, but short-term rates surpass long-term rates every now and then. Historically, these inversions have occurred prior to recessions (as indicated by red vertical bars).
A few observations:
The yield curve may very well invert, but has not inverted yet. The curve almost inverted in 1994, but did not and the next recession was not until 2001.
The recessions charted above have began 12-24 months after the curve first inverted, while it was nearly 3 years after the 1998 inversion.
With rates at historically low levels, there are good reasons to doubt that a flat or inverted yield curve is as predictive as in the past. We have our opinions, but it always pays to see multiple sides of an issue and no indicator should ever been overly relied upon or used in isolation.
The above being said, we do not think that the yield curve is indicating an imminent recession. Of course, the shape of the yield curve does have implications for risk/return dynamics and portfolio positioning and investors should adjust accordingly.
“Do you have any financial advice for new parents?”
A handful of friends have asked me this question in the past week. The question often relates to childcare expenses or college savings plans, but I usually advise new parents to prioritize the below items before anything else. My typical advice sounds something like this:
“Buy enough term life insurance to provide for your family if you and/or your spouse die prematurely. There’s no “right” amount, so ask yourself what you would want covered if you passed. Your salary of x years? Your spouse’s salary so he/she wouldn’t have to work for y years? Childcare expenses for z years? Payoff a mortgage? College tuition? Other expenses? Add those numbers up and go get some quotes.
“Establish an estate plan, including a revocable living trust and will. The will should appoint a guardian for your children if you pass away while they’re still minors, although the courts do have the final say. The will also directs what to do with assets that were excluded from the trust (or forgotten to be put in the trust, which I have seen several times!). The trust should help avoid probate for assets placed within it and provide for supervision of the assets for the benefit of the children.
Unfortunately, the above is often news to new parents. However, both of the above can be one-time decisions, which is a relief for most new parents who are completely overwhelmed with the chaos of parenthood. Neither action is free, but the reduction in risk is well worth the expense IMO.
An extra disclaimer this week: The above is educational and describes advice I have given others, but is not legal or financial advice for readers. Every situation is different and I’m not an insurance agent or an attorney.
The #familiesbelongtogether rallies that took place across the country yesterday are inextricably linked to the for-profit prison industry and may even be connected to your investment portfolio.
Private prisons operated by for-profit companies have been controversial for quite some time, due to subpar safety records, higher costs (which is theoretically their primary benefit), and perverse incentives. Despite consistent criticisms and litigation against them for the aforementioned issues, they may begin to attract even more scrutiny, since the majority of immigrant detainees are held in private prisons.
The recent policy of separating children from their parents at the border was deeply unpopular (and quickly reversed) and I am guessing this will put an even greater focus on these for-profit prison companies. Although the publicly-traded operators Geo Group and Core Civic are included in the major benchmark indices, many responsible indices and investment managers already exclude them. While the stocks are up quite a bit since Trump’s election, negative press and litigation could escalate and convert a social values issue into shareholder value issue.
Upon further analysis, I found that the low-emission portfolio’s overweight to companies with bottom-decile ESG scores was the result of including companies with no ESG scores. The above chart has been updated to only include holdings with an ESG rating. As you can see, the result is that the low-emission portfolio scores very similarly to its benchmark. This illustrates that investors need not sacrifice ESG qualities to materially reduce emissions exposure. On the other hand, the portfolio still has benchmark-like ESG scores, rather than broad improvement. Thus, I believe the main point that investors must prioritize what exposures they want (it may be impossible to target a portfolio with high ESG scores, low emissions, gender diversity, and low tracking error) still remains the same.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Disclosures & Disclaimers page for a full disclaimer.