The rest of the world might be looking a little ragged at the edges, but it seems the US recovery is firmly intact.
On Friday, we learned that the US economy added nearly quarter of a million jobs in September. The unemployment rate has fallen to 5.9%.
That was better than expected. And it means there is no excuse to keep the Federal Reserve’s money-printing programme running beyond this month.
It all points to one thing – the US dollar’s recent strong rebound is set to continue. So what does that mean for investors?
No doubt about it, the US economy is recovering
It’s stupid to take one month of US payroll statistics at face value; these figures are revised all the time. In the latest batch, for example, August’s disappointing data was revised sharply higher – in other words, the employment picture was better than the first release had suggested.
And the methodology can be picked at and fiddled with to prove just about any point you want, and you’ll read plenty of people trying to do just that. Usually, you find that anyone who hates the current bunch in charge of the US will be looking to downplay the figures, and anyone who likes them will embrace them without question.
I have no strong views on US domestic politics, so I look at the statistics without too much baggage. And the fact is, you can’t argue with the trend: the data might have been kneaded and pummelled to within an inch of its life, but joblessness is falling, no doubt about it.
The unemployment rate is now below 6% for the first time in more than six years. The Congressional Budget Office (the economic advisers to Congress) reckons that the ‘natural’ level of unemployment is 5.7%. Broadly speaking, this is the point at which wage pressure starts to build.
In short, employment in the US may not yet be outstandingly healthy, but it certainly doesn’t justify money printing. Having interest rates at ‘emergency’ levels of near-0% seems hard to justify, too.
The question now is when, not if, interest rates in the US will start to rise.
Markets have started to realise this. As a result, the US dollar has made a strong recovery in a very short space of time. The euro has dived – everyone expects money printing to start there as soon as Mario Draghi can figure out a way to fool the Germans into accepting it.
The yen has slid to close to 110 to the dollar. Japan’s fragile recovery means the markets expect more money-printing there too.
As for the pound, Mark Carney is hinting at rate rises, and has been for a while. But given that a volatile and capricious housing market lies at the heart of the UK economy, any investor with a choice will favour a sustainable US recovery over yet another British boom and bust.
Most commodities, meanwhile – as measured in the US dollar at least – have been slaughtered, to put it gently. A world where the US dollar is going up and most other economies are running into trouble (therefore weakening demand for raw materials) is not a healthy environment for commodity prices.
What this all means for investors
Can the dollar’s gains continue? In the short run, the dollar might need to take a breather. But that’s one for the spread betters to wrestle over (my colleague John C Burford has more on short-term forex movements in his free email, MoneyWeek Trader). On that score, I’d watch the Fed minutes on Wednesday carefully for any hints that rates will rise sooner or later than the market thinks.
But for longer-term investors, it’s hard to see the fundamentals changing any time soon. Britain really is the only other developed economy showing much sign of life right now, and as I said, it can’t really compete with the US.
Trouble is, this is a bit of a double-edged sword for US stocks. It’s good news that the economy is recovering. But more competition for labour means higher wages. That means lower profit margins. At a time when US stocks are already overpriced, any pressure on record margins will be unwelcome. And without the prop of quantitative easing, those valuations will look hard to justify if earnings aren’t heading higher too.
But a stronger dollar could be good news for other markets. As long as the euro is weakening, that’s a positive sign (perhaps the only one) for troubled eurozone markets. The same goes for Japan. A weak yen (not to mention falling raw materials prices) is good news for Japan too.
In the most recent roundtable, we discussed the impact of higher interest rates with some of our favourite City experts. And we’ll have more on how to thrive in a world with a stronger dollar in the next issue of MoneyWeek magazine, out on Friday. If you’re not already a subscriber, get your first four issues free here.
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