Rate Cuts on the Way

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 26, 2024

We all knew it was coming…and in Jackson Hole, Federal Reserve Chairman Jerome Powell said it will come next month. He said, “the time has come,” and the futures markets have priced in either a 25 or 50 basis point rate cut at the meeting on September 18.

While the world seems to think the setting of the federal funds rate is the most important decision in monetary policy, we don’t think that’s true. With the advent of the abundant reserve policy in 2008, the Fed separated the link between the money supply and interest rates.

In reality there are multiple things we watch to determine the stance of monetary policy. Interest rates are one, but the rate of growth in M2 is more important…and that growth rate can now be influenced by what the Treasury Department does with the $730 billion it holds at the Fed in something called the Treasury General Account (TGA).

We think the real reason inflation has slowed is because the Fed actually allowed M2 to decline after the massive increase during COVID. Yes, short term interest rates were very low. But it wasn’t those low rates that caused the inflation, otherwise short-term rates that were just as low in the aftermath of the 2008-09 Financial Crisis would have caused a similar surge in inflation.

Similarly, it wasn’t the hikes in short-term interest rates that brought inflation back down. It was the slowdown in M2, in part caused by the growth of the TGA, which the government has used to take roughly $700 billion out of circulation.

This new system of abundant reserves and a large TGA has pushed the US very close to Modern Monetary Theory, where the Treasury can take money out of circulation by borrowing or taxing from the public and then hiding it in the TGA. And the Treasury could always drain the TGA and push $700 billion back into circulation by spending.

We don’t know exactly what the Treasury or Fed will do with Quantitative Easing/Tightening and the TGA, but many seem to believe cutting rates will allow the US to avoid a hard landing. With M2 barely growing, this may not work.

Since 2008, the Fed has held short-term interest rates below inflation 80% of the time, and for nine years, interest rates were basically held at zero. With inflation running 2.5% to 3.0%, the Fed could take the federal funds rate down a full percentage point to roughly 4.5% and rates would be “normal,” unless and until inflation falls further.

Meanwhile, the housing market is probably not poised to surge as short-term interest rates start to decline. Mortgage rates are not going to fall back to 3%. In addition, when the Fed starts cutting rates and people think they will cut them more, they could hold back on purchases waiting for the even lower rates. So sometimes, rate cuts can lead to slower growth in the near term. Also, we have a presidential candidate suggesting a large tax credit for some buyers, which could also postpone purchases into next year.

The Fed has been running an experiment in new monetary policy…in other words, don’t start believing that this change in direction from higher for longer, to lower is the way to stick the landing. We still haven’t felt the full pain from policies undertaken during COVID lockdowns…it takes a lot of imagination to believe all this can happen with no real negative impact.

We are worried that we have come very close to state-run capitalism. In the past year, 82% of all net new jobs have been in government, healthcare and education. Growing budget deficits have been holding up the economy even though the money supply has gone negative. Now, with deficits no longer rising as rapidly, the Fed will try to become the engine behind growth.

But pushing growth with government spending and Fed policy is a dangerous mix that could ignite the embers of inflation before the fire is completely put out. Gold rose to a record high last week, Bitcoin rallied too. The markets are not convinced that inflation has been tamed.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Remember When (Almost) Everyone Was Saying That US Businesses Were Hoarding Workers?

Thoughts of the Week

Eugenio J. Aleman, PhD, Chief Economist

Giampiero Fuentes, CFP, Economist

August 23, 2024

As a businessman and ex-business owner, the idea of firms ‘hoarding’ workers never made sense. As an economist, the idea of firms hoarding workers never made sense either. And since I am a business economist, the idea of firms hoarding workers is ludicrous. So why was it that so many pundits, economists, analysts, and everybody else looking at employment data during 2022 and 2023 argued that the reason for employment to be so strong during those years was because firms were hoarding workers?

Some argued that workers were so scarce that firms were reluctant to get rid of workers. Not only firms were not willing to get rid of workers, but the argument was that they wanted to continue to hire at very high rates because they didn’t know if they were going to be able to hire workers in the future.

We started writing about this issue back in October of 2022 when everybody was talking about firms ‘hoarding workers’ (See our Weekly Economics Thoughts of the Week for October 14, 2022, titled ‘Businesses Hoarding Workers? Say What?’). At that time, we argued that what firms were doing was just trying to go back to pre-pandemic levels of employment and that they were struggling to find workers, not hoarding workers. And because they were struggling to get workers, wages and salaries were going up.

But even after firms were able to catch up to pre-pandemic levels of employment in early 2023 and employment growth continued to remain strong, we argued that we needed to see an important slowdown in employment growth during the second half of 2023 because growth in employment was outpacing growth in economic activity. In our ‘Weekly Economics Thoughts of the Week’ for June 9, June 30, and July 07, 2023, we beat the drum that employment growth numbers were making no sense.

However, almost everybody else was trying to adjust their narratives to the numbers being reported rather than analyzing what was happening in the economy and concluding that job numbers coming out from the establishment survey were too good to be true. Of course, we never joined the bandwagon of conspiracy theories regarding the reason why we believed the numbers were wrong. The reason is because we have previous experience with the damage severe crises have on statistical calculations and we knew that nobody was trying to use these numbers for political purposes.

On Wednesday of this week, the Bureau of Labor Statistics (BLS) provided a preliminary estimate of the establishment benchmark revision, which indicated, preliminarily, that from April 2022 until March of 2023, the number of jobs created in the US economy was revised down from an original 2.9 million to 2.1 million. That is, the BLS indicated that their preliminary revision was lower by 818 thousand than originally estimated, or about 68 thousand less per month during those 12 months.

Again, we want to put an emphasis on the preliminary nature of this number because this is not going to be the last number. The final numbers will be released when the January 2025 establishment numbers are reported, which is going to be on February 6, 2025.

If we take a look at the chart below, we see that Wednesday’s revision was second in absolute numbers to 2009’s revision, which was -902 thousand. Thus, it is clear that after a severe recession, which was the case for the Great Recession as well as the pandemic recession, these estimates tend to produce very large negative errors in nonfarm payrolls estimates.

Again, this number may come down or move higher once we get the final numbers in February of 2025, but there is nothing mysterious or nebulous about it. It is just the nature of the beast. And as our RJ CIO Larry Adam argued during the Summer Development Conference in Orlando in July of this year, this is the reason why we use a combination of sources and our experience analyzing the economy to guide our research and our view on the economy and the markets. And that is why we wrote so many reports over the last two years providing our interpretation of what was happening to the US labor market.

Having said this, the large revision by the BLS still puts US employment growing at a strong clip during those 12 months, with growth in nonfarm payrolls ‘slowing down’ to an average of 173 thousand from an original pace of 242 thousand, which is still extremely strong compared to a historical average of 124 thousand per month before April of 2023 and going back to 1939. Therefore, the labor market remains in good condition despite recent increases in the unemployment rate as well as our belief that it has continued to weaken. Being that ‘to maintain full employment’ is one of the Fed’s two mandates, the slowdown in employment growth is an additional reason to support our view that the Fed will ease rates starting in September.

Economic Releases:

Existing Home Sales: The increase in existing homes during July brought down the months’ supply of homes for the first time in five months. The year-over-year increase in home prices will continue to be the most important risk for the Federal Reserve because lower interest rates will add to the current pressure on home prices due to the still limited availability of homes for sale despite the improvements we have seen over the last several months. Existing-home sales increased by 1.3% during July on a seasonally adjusted basis and compared to June, according to the National Association of Realtors (NAR). According to the release, existing-home sales were down by 2.5% on a year-earlier basis. By region, the Northeast saw a month-over-month increase of 4.3% in existing-home sales (also up 2.1% compared to July of last year) while existing-home sales remained flat in the Midwest, month-over-month, while declining by 5.2% compared to a year earlier. The largest region of the country, the South, saw existing-home sales increasing 1.1% compared to June while declining by 3.8% compared to the same month a year earlier. Finally, the West saw existing-home sales up by 1.4% both on a month-over-month as well as year-earlier basis. The sales price of existing homes increased by 4.2% on a year-earlier basis. The inventory of existing homes for sale increased to 1.333 million in July while months’ supply dropped slightly, from 4.1 months in June to 4.0 months in July. This was the first increase in existing home sales in five months while it was the first time months’ supply declined this year. Months’ supply was down 2.4% in July compared to the previous month but up 21.2% compared to July of last year.

Leading Economic Indicators: The worse than expected Leading Economic Index (LEI) continued to point to a weakening US economy during the third and fourth quarters of the year, which is consistent with our view on the US economy. The Conference Board’s Leading Economic Index (LEI) declined by 0.6% in July, the institution reported today. This decline was twice as large as FactSet expectations for a 0.3% decline. The Conference Board also indicated that while the LEI indicates weakness in real GDP, it still doesn’t expect a recession, just a weakening in economic activity during Q3 and Q4 2024. The Conference Board’s Coincident Economic Index (CEI) stayed unchanged in July of this year after a 0.2% increase in June. The Conference Board’s Lagging Economic Index (LAG) declined 0.1% during July after increasing 0.2% in the previous month. According to The Conference Board’s Senior Manager, Justyna Zabinska-La Monica, “In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread.”

New Home Sales: The strong increase in new home sales has pushed down the median price of new homes in July by 1.4% compared to a year earlier. Furthermore, the strong increase in new home sales brought down the months’ supply of homes to 7.5 months from 8.4 months at the end of June of this year. The decline in prices of new home sales will help put downward pressure on the price of existing homes. However, the decline in months’ supply of new homes has the potential to make the year-over-year decline in new home prices short lived. New home sales of single-family homes surged by 10.6% in July to a seasonally adjusted annual rate of 739,000 compared to an upwardly revised June rate of 668,000, according to the US Census Bureau and the US Department of Housing and Urban Development. Compared to last year, new home sales were up by 5.6%. By region, new home sales in the Northeast were up 6.9% while the Midwest saw a 9.9% increase. The South experienced an increase of 2.9% while in the West, sales surged by 33.8%. All of the regions experienced an increase in new home sales on a year-over-year basis according to the release. The median sales price of new home sales in July of this year was $429,800 compared to a median price of $435,800 in July of last year. The average price was $514,800 in July of this year compared to an average price of $507,600 in July of last year. The months’ supply of homes in July was down to 7.5 months compared to 8.4 months in June of this year and 7.3 months’ supply in July of last year. Clearly, the recent surge in new home construction completions has put a lot of pressure on sales of new homes, so much that the effort has meant that home sellers have had to reduce the price of new homes.

DISCLOSURES

Economic and market conditions are subject to change.

Opinions are those of Investment Strategy and not necessarily those of Raymond James and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no assurance any of the trends mentioned will continue or forecasts will occur. Last performance may not be indicative of future results.

Consumer Price Index is a measure of inflation compiled by the US Bureau of Labor Statistics. Currencies investing is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Consumer Sentiment is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in the first quarter of 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

Personal Consumption Expenditures Price Index (PCE): The PCE is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The change in the PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

The Consumer Confidence Index (CCI) is a survey, administered by The Conference Board, that measures how optimistic or pessimistic consumers are regarding their expected financial situation. Current Situation Index (CSI) and Future Expectations Index (FEI) are the end-results of CCI, covering economic conditions, employment, price, income, and expense. The reading is 100 plus the average of said five factors.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.

GDP Price Index: A measure of inflation in the prices of goods and services produced in the United States. The gross domestic product price index includes the prices of U.S. goods and services exported to other countries. The prices that Americans pay for imports aren't part of this index.

The Conference Board Leading Economic Index: Intended to forecast future economic activity, it is calculated from the values of ten key variables.

The U.S. Dollar Index is an index of the value of the United States dollar relative to a basket of foreign currencies, often referred to as a basket of U.S. trade partners' currencies. The Index goes up when the U.S. dollar gains "strength" when compared to other currencies.

The FHFA House Price Index (FHFA HPI®) is a comprehensive collection of public, freely available house price indexes that measure changes in single-family home values based on data from all 50 states and over 400 American cities that extend back to the mid-1970s.

The Pending Home Sales Index (PHSI) tracks home sales in which a contract has been signed but the sale has not yet closed.

Supplier Deliveries Index: The suppliers' delivery times index from IHS Markit's PMI business surveys captures the extent of supply chain delays in an economy, which in turn acts as a useful barometer of capacity constraints.

Backlog of Orders Index: The Backlog of Orders Index represents the share of orders that businesses have received but have yet to start or finish. An increasing index value usually indicates growth in business but shows that output is below its maximum potential.

Import Price Index: The import price index measure price changes in goods or services purchased from abroad by U.S. residents (imports) and sold to foreign buyers (exports). The indexes are updated once a month by the Bureau of Labor Statistics (BLS) International Price Program (IPP).

ISM Services PMI Index: The Institute of Supply Management (ISM) Non-Manufacturing Purchasing Managers' Index (PMI) (also known as the ISM Services PMI) report on Business, a composite index is calculated as an indicator of the overall economic condition for the non-manufacturing sector.

Consumer Price Index (CPI) A consumer price index is a price index, the price of a weighted average market basket of consumer goods and services purchased by households.

Producer Price Index: A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output. Industrial production:

Industrial production is a measure of output of the industrial sector of the economy. The industrial sector includes manufacturing, mining, and utilities. Although these sectors contribute only a small portion of gross domestic product, they are highly sensitive to interestrates and consumer demand.

The NAHB/Wells Fargo Housing Opportunity Index (HOI) for a given area is defined as the share of homes sold in that area that would have been affordable to a family earning the local median income, based on standard mortgage underwriting criteria.

Conference Board Coincident Economic Index: The Composite Index of Coincident Indicators is an index published by the Conference Board that provides a broad-based measurement of current economic conditions, helping economists, investors, and public policymakers to determine which phase of the business cycle the economy is currently experiencing.

Conference Board Lagging Economic Index: The Composite Index of Lagging Indicators is an index published monthly by the Conference Board, used to confirm and assess the direction of the economy's movements over recent months.

New Export Index: The PMI new export orders index allows us to track international demand for a country's goods and services on a timely, monthly, basis.

Durable Goods: Durable goods orders reflect new orders placed with domestic manufacturers for delivery of long-lasting manufactured goods (durable goods) in the near term or future.

Source: FactSet, data as of 8/23/2024

The Current State of Household Debt

First Trust Economics

Three on Thursday

Brian S. Wesbury - Chief Economics

August 22, 2024

In this week’s Three on Thursday, we explore the current state of indebtedness and financial health of U.S. households. Each quarter, the Federal Reserve Bank of New York provides a comprehensive overview of consumer borrowing and repayment trends, drawing from a nationally representative sample of Equifax credit reports. This data is thoroughly analyzed to estimate the total debt balances and delinquency rates across the country, offering valuable insights into how American households are managing their financial obligations. Curious about the latest trends? Dive into the three charts below to get a clearer picture of where things stand today.

Household debt balances grew by $109 billion in the second quarter of 2024, marking a 0.6% increase from the previous quarter, bringing the total to $17.80 trillion. Mortgage balances increased by $77 billion, reaching $12.52 trillion, accounting for 70% of overall household debt. This has provided stability for households despite a higher interest rate environment, as 94.3% of these mortgage loans are fixed-rate, with an average rate of 4%. Additionally, non-housing debt balances increased by $28 billion.

Aggregate delinquency rates were unchanged from the previous quarter, with 3.2% of outstanding debt in some stage of delinquency. Besides last quarter, Delinquency rates sit at the highest rate since the fourth quarter of 2020. Over the past year, about 9.1% of credit card balances and 8.0% of auto loan balances have transitioned into delinquency, indicating rising financial strain in these areas. Mortgage delinquency rates edged up by 0.1 percentage point in early-stage delinquencies but remain low by historical standards. The overall 3.2% delinquency rate is still relatively low, but is largely due to the ongoing impact of student loan forbearance.

The share of credit card balances 90+ days delinquent has risen to 10.9%, the highest since Q1 2012. Meanwhile, student loan delinquencies have dropped from around 11% in 2012 to just 0.65%, thanks to the CARES Act, which paused payments and set interest rates to zero. Although payments resumed in October 2023, delinquencies have remained low due to an “onramp” period that allows borrowers to delay payments without penalties until September 2024. However, as interest accrues, delinquencies are expected to rise once this temporary relief ends.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Price Controls Redux?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 19, 2024

Unfortunately, when it comes to the government, what’s old is sometimes new again.

Back in the late 1960s and 1970s the Federal Reserve printed too much money relative to Real GDP, resulting in repeated bouts of high inflation. President Nixon, having been burned by a mild recession in 1960 the first time he pursued the presidency, wanted to make sure there was no hint of recession in 1972, the year he’d be seeking re-election.

As a result, in 1971, when Nixon closed the “gold window” at the Fed – to give the Fed the chance to print money more freely – he also imposed wage and price controls to try to temporarily hide the inflation that would inevitably result. After the election the controls went away and inflation surged, averaging more than 9% per year from 1973 through 1975. No wonder Nixon got so unpopular after the election!

But price controls have a long and sordid history all over the world, including in ancient Egypt, Babylon, as well as ancient Rome and even modern-day Zimbabwe and Venezuela. During the French Revolution, in 1793, the rapid inflation caused by the paper money issued under the revolution led to price controls enforced by the death penalty, then implemented by the guillotine. But even lopping off heads didn’t fix the problem and shortages were one of the damaging results.

Why do governments periodically do this? Because inflation is political kryptonite. Prior to COVID the US had inflation under control for almost forty years. Now, with inflation having remained stubbornly high the past few years – even though it’s decelerated the last two years – some politicians feel compelled to act, especially because while the rate of inflation is down, the price increases of recent years are still in place.

Politicians say it couldn’t possibly be their fault prices went up too fast, it must be someone else’s, like those wicked “price gougers’ in the private sector, lining their pockets with workers’ hard-earned dollars. But if price gouging is the reason for recent inflation, why weren’t these gougers doing it the past forty years? What changed?

And why has the inflation been such a global phenomenon? Inflation surged around the world, not only in the US. Is every single company in the world price gouging, and if so, doesn’t that present a once in a lifetime opportunity for someone to take market share by reducing prices?

Meanwhile, the cost of government has soared but those who accuse the private sector of price gouging are ignoring that. Since 2012, Chicago school spending per student is up 97% even as test scores have gone down.

But we shouldn’t just pick on Chicago schools. A recent study that used AI looked at SAT scores since 2008. Including the effect of the test getting easier, average math scores are down more than 100 points in the past fifteen years with most of the drop since 2019, right before COVID. Those who want to impose price controls on the private sector want to punish shrinkflationists. But schools have been charging more and shrinking the education they’re giving our kids. Where is the plan to fix that?

Ultimately, the best way to fight inflation is to have the Fed focus on price stability while the government minimizes taxes and regulation to encourage competition and risk-taking. Competition, not new regulations, is the way to keep prices down. School vouchers would certainly accomplish this for education.

The key assumption behind price controls is the rationalist delusion that some group of policymakers can figure out what a “fair” price is for each and every good and service across the vast US economy. It’s the pretense of the kind of central planners who ran the Soviet Union’s economy for decades.

The good news is that we think price controls are a very long shot to take effect. Even already, a candidate suggesting price controls is backpedaling, probably realizing that many political allies think it’s a very bad idea. Meanwhile, it’s unlikely that, outside wartime, such a plan could be imposed without new legislation and that legislation would probably not have the votes to pass.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Week Ahead

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 12, 2024

Pretty much every month there’s one week that has the most important economic reports. For the month of August that’s this week. The reports this week include consumer price inflation, producer prices, retail sales, industrial production, housing starts, and unemployment claims.

As it stands, it looks like the broader economy is decelerating as the tighter monetary policy of the past two years finally gains traction. The deceleration has taken longer than it normally does, probably due to the unusual nature of COVID lockdowns and reopening, the massive amount of monetary stimulus that preceded the tightening, plus the unusual expansion of the federal budget deficit last year, in spite of low unemployment and a Supreme Court decision on student loans that artificially reduced the official deficit last year.

In the past two weeks economic reports have included a decline in construction, slower job growth, and mixed ISM indexes, with manufacturing signaling contraction while the service sector remains slightly positive.

What’s likely for this week? It looks like both consumer and producer prices rose 0.2% in July, which would be welcome news compared to the higher average inflation rates of the past few years. If tighter money is gaining traction, these inflation rates should slow even further later this year. It doesn’t mean this trend will be permanent, though. Eventually the Federal Reserve will loosen once again, probably too much, and send inflation higher.

Meanwhile, retail sales and industrial production should bring mixed news. Due to a bounce back in auto sales in July, after the technology-related snafus at auto-dealers in June, total retail sales should be up for the month. However, even if they grow the 0.5% we expect, that would leave them up only 2.5% from a year ago, barely treading water versus inflation.

Worse, we anticipate a decline in industrial production for July, led by the manufacturing sector. Production should still be up slightly versus a year ago, but not by much.

Does this mean the US is already in recession? Not yet. But dark clouds are gathering. Monetary policy is tight right now and has been for some time. Meanwhile, capital standards for banks are likely tightening up even as cuts in short-term rates are nearing. Investors should be wary about slower economic growth than the financial markets now assume.

In the meantime, taking all these data in, it looks more like stagflation than at any time since the 1970s. In spite of AI, space travel, and 3D printing, the economy is growing slowly with inflation still above the 2% level most people have wrongly considered “price stability.” COVID lockdowns and then reopening have seriously impaired seasonal adjustments. Massive federal deficits have allowed spending to continue, but created a bill that is coming due.

The US has backed itself into an economic corner where many are demanding more government interference. We wish we knew exactly how this will end, but experimental policies of the Fed and Treasury are making it very hard to predict.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Lags are Over for Tighter Money

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

August 5, 2024

As Milton Friedman taught us many decades ago, monetary policy works with long and variable lags. Recent economic reports suggest that the long and variable lags on the tightening of monetary policy in 2022-23 are starting to come to an end.

Both inflation and economic growth are decelerating. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a decline in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years. The CPI was still up 3.0% in June versus the year prior, but this year-ago comparison looks like it decelerated in July and will probably do so again in August, given that oil prices are down.

Meanwhile, we are seeing more and more softness in the economy. The housing sector remains mired in slow construction and slow sales. The dollar value of new private housing construction is down in each of the past three months. Recent existing home sales are near the lowest level since the housing bust in 2010; new home sales are lower than they were prior to COVID.

The national ISM Manufacturing index came in at 46.8 for July, below the forecast from every economics group that submits a forecast to Bloomberg and, more important, below 50, which signals contraction. The production component of the index declined to 45.9, the lowest since the COVID Lockdown.

And then the July employment report showed a marked deceleration in job creation, with payroll gains (net of downward revisions for prior months) a tepid 85,000. We like to follow payrolls excluding government (because it's not the private sector), education & health services (dominated by government) and leisure & hospitality (which is still recovering from COVID Lockdowns). That “core” measure of payrolls rose just 17,000 in July, the smallest gain so far this year. At the same time, the unemployment rate rose to 4.3%, 0.4 percentage points higher than it was three months ago, an increase that in the past has often (but not always) been associated with a recession.

It is true that the M2 measure of money bottomed in October and has since been trending upward, but the gain since then has only been 2.4% annualized, much slower than the 6.1% annualized average during the twenty years leading up to COVID, a time when the CPI gained a moderate 2.1% per year.

Put it all together – decelerating inflation and decelerating growth, along with an abnormally slow rebound in M2 – and we have a strong case that the Federal Reserve has implemented tight money. In turn, given the lags between shifts in policy and its economic effects, the Fed now has room to shift to a monetary policy that is less tight.

To most analysts and investors, that means cutting the short-term target rate. As of late Sunday, the futures market in federal funds showed almost 125 basis points in rate cuts later this year. But lower rates, by themselves, are not easier monetary policy.

Instead, the Fed needs to start focusing on the money supply, particularly on M2. If the Fed cuts short-term rates but growth in the money supply remains weak because of tighter capital requirements on banks or because businesses and consumers expect even lower rates further ahead (which might lead them to temporary postpone economic activity) then it isn’t really making monetary policy less tight.

There is a widespread myth that 1980s Fed Chairman Paul Volcker beat inflation by sharply raising short-term interest rates. In truth, he did no such thing. What Volcker did was focus on the money supply and getting its growth under control. That meant using the Fed’s open-market operations to soak up excess liquidity. And it was those operations which resulted in higher short-term rates and lower inflation. The causation is important: less money meant higher rates, but Volcker’s focus was on the money. If he could have withdrawn the excess liquidity without higher rates, he would have been happy to do so.

The problem today is that the current Fed has abandoned a focus on the money supply and has swapped a system of scarce reserves for one in which reserves are excessively abundant, which means short-term interest rates are directly controlled by the government, rather than the market. Investors have a great deal riding on whether the Fed gets it right. Focusing on the money supply will help show how successful the Fed will be.

And, finally, there is a real potential here for the Fed to overreact. The world has gotten used to extremely low interest rates and very easy money. The stock market was overvalued and unemployment was artificially low. If the Fed thinks that was normal it will try to add more money than needed and risks creating stagflation. Just like it did in the 1970s.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Want Affordable Housing? Build Homes, Cut Government

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 29, 2024

Listen to enough politicians and it won’t take long to hear about the lack of “affordable” healthcare, drugs, daycare, and housing. This was going on long before inflation returned after COVID. Everyone wants affordable things.

But the concept of affordability is made up of two components – the price of something and the income of the person who wants to possess it.

There are complicating factors in every market, so let’s focus on one – housing. Almost everyone thinks home prices and rents are just too damn high.

Many blame this on greedy landlords and investment firms buying up apartments and homes. President Biden (prior to his withdrawal from the presidential race) said he wants to impose a form of national rent control on “corporate” landlords.

There should be no doubt that a typical home today costs much more relative to income than it used to. The median price of an existing single-family home that sold in 2022 was about $390,000, which was 5.2 times higher than median household income of $74,580 that year (the most recent year for which median income is available).

By contrast, back in 1968, the median price of an existing single-family home was only 2.6 times median household income. As recently as 2011, the bottom of the housing bust, the ratio was only 3.3 and even at the peak of the housing boom in 2005, the ratio was 4.7. No wonder so many people are finding housing hard to afford.

This is not due to greedy landlords and homebuilders. Government entities of all kinds restrict building and add massive costs through regulation, which all limit housing supply. And don’t forget the inflation caused by excess money printing. Many workers in the US have not seen their wages keep up.

On top of this the US has allowed massive immigration, which increases the demand for housing, while homebuilders have not built enough new homes for basically the last 15 years – since the housing bust of 2007-2009.

But the least talked about issue with affordable housing is the income side. Today, federal, state and local government expenditures, plus the cost of complying with government regulations take at least 50% out of the entire Gross Domestic Product of the United States.

In other words, working Americans, on average, are left with only 50% of what they earned. If government used that money to do things that were more productive than the private sector, we would all be better off. But government programs are less efficient. Elon Musk’s SpaceX is massively more efficient than NASA ever was.

The more the government spends based on political priorities the less taxpayers can spend. And taxing Peter to give money to Paul makes it harder for Peter to buy a house, while Paul probably can’t afford one either. Redistribution limits opportunity. The more the government grows, the less affordable housing becomes. And, yet, no one talks about it.

Ultimately, if populists want to address the problem of housing affordability, they need to give power to the people by letting them keep their earnings, while government stops giving money to people, while grabbing power for itself.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Moderate Growth in Q2

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 22, 2024

There are signs US economic growth is slowing down. In particular, jobless claims, perhaps the best high-frequency economic indicator, have averaged 235,000 per week in the last four weeks versus 211,000 in the first quarter. Meanwhile, continuing jobless claims are creeping up while overall retail sales are up a meager 0.2% in the past six months, slower than the pace of inflation.

The US is not in a recession at this point but higher claims and soft sales, along with a renewed deceleration in inflation (consumer prices ticked down 0.1% in June), suggest that the drop in the M2 measure of the money supply from early 2022 through late 2023 is finally gaining traction.

We may also be witnessing the end of the temporary and artificial impact of last year’s surge in the budget deficit. In the absence of the Supreme Court’s decision to overturn much of President’s Biden’s plan to forgive student loans, the budget deficit would have been 7.5% of GDP last year. That’s well larger than any year on record when the US was not engaged in a World War and the unemployment rate was below 4.0%.

We estimate that Real GDP expanded at a 2.1% annual rate in the second quarter, mostly accounted for by an increase in consumer spending. (This estimate is not yet set in stone; reports Wednesday about international trade and inventories might lead to an adjustment.)

Consumption: “Real” (inflation-adjusted) retail sales outside the auto sector grew at only a 0.3% annual rate in Q2 but auto sales rebounded at a 9.8% rate. Meanwhile, it looks like real services, which makes up most of consumer spending, grew at a 2.1% pace. Putting it all together, we estimate that real consumer spending on goods and services, combined, increased at a 2.1% rate, adding 1.4 points to the real GDP growth rate (2.1 times the consumption share of GDP, which is 68%, equals 1.4).

Business Investment: We estimate a 1.7% growth rate for business investment, with gains in intellectual property leading the way, while commercial construction declined slightly. A 1.7% growth rate would add 0.2 points to real GDP growth. (1.7 times the 14% business investment share of GDP equals 0.2).

Home Building: Residential construction grew in the second quarter in spite of some lingering pain from higher mortgage rates. Home building looks like it grew at a 4.9% rate, which would add 0.2 points to real GDP growth. (4.9 times the 4% residential construction share of GDP equals 0.2).

Government: Only direct government purchases of goods and services (not transfer payments) count when calculating GDP. We estimate these purchases were up at a 1.7% rate in Q2, which would add 0.3 points to the GDP growth rate (1.7 times the 17% government purchase share of GDP equals 0.3).

Trade: Looks like the trade deficit expanded in Q2, as exports grew but imports grew much faster. In government accounting, a larger trade deficit means slower growth, even if exports and imports both grew. We’re projecting net exports will subtract 0.8 points from real GDP growth.

Inventories: Inventory accumulation looks like it picked up in Q2 relative to Q1, translating into what we estimate will be a 0.8 point addition to the growth rate of real GDP.

Add it all up, and we get a 2.1% annual real GDP growth rate for the second quarter. Good news compared to a recession but not a great starting point if a tighter monetary policy starts to bite harder.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

M2 Slowdown Finally Gaining Traction

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

June, 15, 2024

The lags between a shift in monetary policy and the economic impact are long and variable. While the actions of the Federal Reserve during the pandemic were unprecedented, it finally looks like the excess money pumped into the economy has worked its way through the system. And with the M2 measure of the money supply down from its peak, the economy is reacting.

This measure of the money supply surged in 2020-21 in the first two years of COVID as the government massively increased deficit spending and enacted temporary tax cuts that didn’t improve the long-term incentives to work, save, and invest. The resulting spike in inflation in 2021-22 certainly didn't surprise us, and it should not have surprised anyone else.

Yet it did. Many went out of their way to find other things to blame for inflation. They ignored M2, and blamed “Putin” or “supply chains” and called inflation “transitory.”

Sure, some prices were boosted by the lockdowns and war, but that was only a small fraction of the problem. If it was the whole problem or most of it, we wouldn’t be sitting here more than four years later with the consumer price index up 3.0% from a year ago. If it were all “transitory,” we should have seen a widespread drop in consumer prices, and that didn’t happen.

The Fed itself continues to ignore the money supply. Fed officials never bring up the topic on their own and reporters rarely if ever ask about it. And on the rare occasion when Fed Chairman Jerome Powell is asked about the money supply, he goes out of his way to say it’s not something the Fed pays much attention to.

However, the link between money and inflation is starting to get some more attention. A recent paper by Greg Mankiw, an academic economist who was the chairman of the Council of Economic Advisers under President George W. Bush, noted that forecasts of high inflation that were made back in 2021 that considered the M2 surge turned out to be right. (Note: the First Trust economics team won an award as the most accurate economists for the US economy for 2022, and we recognized the importance of the M2 surge.)

Which brings us to where the economy is right now. Consumer prices declined 0.1% in June, the largest drop for any month since the early days of COVID. Much of this was due to a drop in energy prices, but even “core” consumer prices were soft, up only 0.1% for the month, the smallest increase for any month in more than three years.

Meanwhile, we are seeing some softness in economic growth. Overall retail sales in May were no higher than in December (after adjusting for normal seasonal variation) and it looks like retail sales fell in June (to be reported Tuesday). Manufacturing production is likely lower than a year ago (reported Wednesday).

Considering that the M2 measure of money peaked roughly two years ago, this should not be surprising. The drop in M2 from early 2022 through late 2023 appears to be finally having an effect.

The wild card is that M2 is up at a modest 2.3% annual rate since last October. If this keeps up, a soft landing is possible while inflation continues to move back down to the Fed’s target. It could also leave room for some rate cuts by the Fed. By contrast, if the M2 money supply resumes a decline, that would raise the risk of a recession and if M2 surges again, it could herald a revival of inflation like we had in the 1970s.

Either way, we are glad the M2 money supply is starting to get more attention, we still follow it closely, and think investors should pay attention, as well.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

S&P 500 Index 1H

First Trust Economics

Three on Thursday

Brian S. Wesbury - Chief Economist

July 11, 2024

This week’s edition of “Three on Thursday” focuses on the S&P 500 Index’s performance in the first half of 2024. As a widely respected barometer for the overall stock market, the S&P 500 Index tracks the performance of 500 of the largest companies listed on U.S. stock exchanges. The Index uses a market-cap weighting approach, giving a higher percentage allocation to companies with larger market capitalizations, adjusted for the number of publicly traded shares. In the first half of the year, the S&P 500 Index achieved a remarkable total return of 15.3%, reaching all-time highs 31 times during this period, with a maximum drawdown of only 5.8%. An exceptional first half, indeed! Below are three insightful charts that provide a deeper understanding of the events that shaped this extraordinary first half of the year.

The “Magnificent 7” companies – Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta – which currently hold a combined 29.5% weighting in the S&P 500 Index, accounted for 59.6% of the Index’s 15.3% total return in the first half of 2024. Nvidia stood out with an impressive 149.5% increase, leading the group in contribution. However, not all members of this elite cohort saw positive growth; Tesla experienced a decline of 20.4%, detracting 0.39 percentage points from the market’s overall performance and slipping to the eleventh position by market capitalization, with Berkshire Hathaway replacing it in the seventh slot. If Berkshire Hathaway replaced Tesla in the Magnificent 7, the new group’s contribution to the overall market return for the first half of 2024 would increase to 63.7%.

Although the S&P 500 Index gains have been predominantly driven by the Magnificent 7, it is essential to also consider earnings. Over the past year, the Magnificent 7 have contributed 86.7% to the S&P 500 Index’s earnings growth but only 59.6% to its price gain. Five of these seven companies have seen a higher contribution to the Index’s earnings growth compared to their share of S&P 500 Index price gain. For example, Amazon accounted for 19.3% of the S&P 500 Index’s earnings growth over the past year but only 6.2% of its price gain. While the market gains have been narrow, the concentration in earnings growth has been even more pronounced.

In 2023, market advances were very concentrated, with a mere 27% of firms within the S&P 500 Index surpassing the Index’s performance. The first half of 2024 showed even further narrowing with just 24% of companies in the Index outperforming the overall Index. The proportion of companies surpassing the Index is the lowest going back to 1995 and significantly below the 29-year average of 48%, indicating that the market remains unprecedentedly narrow. However, with earnings expected to accelerate outside of the “Magnificent 7” in the second half of the year, there is hope for some market broadening on the horizon.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

How Strong is the Labor Market?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 8, 2024

We aren’t naturally cynical about economic data, but there are things that don’t add up about the job market.

On the surface, Friday’s report was solid, with nonfarm payrolls up more than 200,000 in June, another good month. However, downward revisions to the prior two months reduced the net gain in total payrolls to just 95,000, with a net gain of only 50,000 for the private sector.

Now for the strange parts. Nonfarm payrolls are up 2.6 million versus a year ago. But civilian employment, an alternative measure of jobs that includes small business startups is up a grand total of only 195,000 in the past year! Not 195,000 per month, but a total of just 195,000 over the past twelve months. Weird, right?

It's entirely possible that one of the major reasons for this gap is the recent surge in immigration. Immigrants who get jobs at one of the companies included in the payroll survey should be counted because it is filled out by employers. But the civilian employment figures (the weak one) are based on a survey of individual households and it’s hard to survey households in the US that are brand new or that are skittish about filling out a survey sent by the government, particularly if they are here illegally.

It's also important to point out that a gap between the two surveys this large may be highly unusual, but it has happened before. As a share of the labor force, the gap was briefly larger in the mid-1980s, the late 1990s, in 2013, and during COVID.

Another oddity is the consistent negative revisions for the past few years. Back in 2022, the third report for payrolls for a particular month averaged 6,000 less than the initial report for that month. For 2023, the revisions averaged -30,000. So far this year they’ve averaged -49,000. In the past few decades, negative revisions are more likely to happen around recessions than when growth is strong. So maybe it’s a symptom of weakness to come.

But there’s also a more benign explanation. Remember, the payroll report is based on a survey of employers. In the ten years prior to COVID, the government was getting an on-time response rate of 75% from the employers it surveys; but in the past three years the timely response rate has averaged only about 65%.

So maybe the companies that don’t fill out the survey on time for the first payroll report are having more business trouble than their peers (compared to normal). A struggling company would have more important issues to deal with than filling out a government survey. Eventually, the statisticians will get used to that pattern and make adjustments, but the data are looking funny in the meantime.

Another oddity is the gap between full-time and part-time jobs. The civilian employment report shows full-time jobs down 1.6 million in the past year while part-time is up 1.8 million. That kind of loss of full-time positions is normally linked to a recession and declining payrolls, not continued strong economic growth.

Do these anomalies show the government is cooking the books? We wouldn’t go that far. If the Labor Department is cooking the books, presumably for political reasons, then why are they letting the unemployment claims reports show an increase and why don’t they cook the civilian employment report to show more job gains closer to what the payroll report shows?

The problem is that it’s hard to argue at this point that government officials haven’t abused their authority to advance a narrative they’ve found useful, including the “slam dunk” case for Iraq having Weapons of Mass Destruction, or COVIDs “six-foot” rule, school closings, and masks, or even whether the measure of deaths from COVID were “from” COVID or “with” COVID. It’s not just the CDC and NIH that have lost luster in the eyes of average investors, but other government agencies as well. More people are skeptical of government reports than we have seen in our careers.

Putting it altogether, we think the job market is poised somewhere between the still strong picture painted by the payroll report and the soft reports on civilian employment. No recession yet, but some early signs of a slowdown.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

America's 3.5-Second Miracle

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

July 1, 2024

In 1852, Karl Marx said "Men make their own history, but they do not make it as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered and transmitted from the past."

He, obviously knew about the Magna Carta (1215) and the English Parliament’s Bill of Rights (1689), which created a separation of powers between the King and elected representatives. What he didn’t pay much attention to was how the United States had improved upon these documents or he would have seen a country of entrepreneurs that had freedom and property rights along with a constitution so well thought out that it has only been amended twenty-seven times in 235 years. No one puts it better than Ronald Reagan; the excerpt below comes directly from his Commencement Address at the University of Notre Dame back on May 17, 1981.

"This Nation was born when a band of men, the Founding Fathers, a group so unique we've never seen their like since, rose to such selfless heights. Lawyers, tradesmen, merchants, farmers – fifty-six men achieved security and standing in life but valued freedom more. They pledged their lives, their fortunes, and their sacred honor. Sixteen of them gave their lives. Most gave their fortunes. All preserved their sacred honor.”

“They gave us more than a nation. They brought to all mankind for the first time the concept that man was born free, that each of us has inalienable rights, ours by the grace of God, and that government was created by us for our convenience, having only the powers that we choose to give it. This is the heritage that you're about to claim as you come out to join the society made up of those who have preceded you by a few years, or some of us by a great many.”

“This experiment in man's relation to man is a few years into its third century. Saying that may make it sound quite old. But let's look at it from another viewpoint or perspective. A few years ago, someone figured out that if you could condense the entire history of life on Earth into a motion picture that would run for 24 hours a day, 365 days – maybe on leap years we could have an intermission – this idea that is the United States wouldn't appear on the screen until 3.5 seconds before midnight on December 31st. And in those 3.5 seconds not only would a new concept of society come into being, a golden hope for all mankind, but more than half the activity, economic activity in world history, would take place on this continent. Free to express their genius, individual Americans, men and women, in 3.5 seconds, would perform such miracles of invention, construction, and production as the world had never seen.”

America has proven that men and women not only can make their own history, but they can make it as they please, with circumstances chosen by themselves. Happy 4th of July to you all. Let’s take time this week to step back and realize just how fortunate we are to live in a time and place where the fire of invention still burns hot, course corrections (however messy they may be) still take place, and the future remains as bright as ever. May we continue to honor the legacy of those who came before us by striving to uphold the principles that have made this country a beacon of hope and freedom for the world. (We first published a version of this same Monday Morning Outlook in celebration of July 4th, 2023.)

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.