Market perspective August 2014

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Market Perspective for August examines the improvements made in the labor market and the potential impact that rising wage inflation may have on corporate profit margins.

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<ul><li><p>Market Perspectives August 2014 </p><p>Experience Insight Impact </p><p>Overview: Since 2009, the labor market has shown steady improvement. The unemployment rate has declined to 6.2% (from 10%) and non-farm payrolls have been above 200k for six straight months. However, labor force participation is at generational lows and wage growth has been modest. This month, we take a look at some of these important trends with a particular eye towards the Federal Reserves dual mandate of maximum employment and stable prices. Investors are closely watching trends in the labor markets for signals regarding future interest rate movement. As labor markets continue to improve, we are monitoring rising wage inflation as this may hinder margin growth and accordingly, impact earnings growth going forward. </p><p>biegelwaller.com </p><p>1 </p><p>Labor Market Update: Where are we now? </p></li><li><p>Experience Insight Impact </p><p>The Unemployment Rate has Steadily Declined after Peaking at 10% in October 2009 </p><p>2 </p></li><li><p>Experience Insight Impact 3 </p><p>However, the Strength of the Recovery has been Overstated by a Declining Labor Force Participation Rate </p></li><li><p>Experience Insight Impact </p><p>Average Hourly Earnings Growth has been Near 2%, Suggesting Modest Wage Inflation </p><p>4 </p></li><li><p>Experience Insight Impact </p><p>Operating Profit Margins Are at Peak Levels </p><p>5 </p><p>Low interest rates and labor costs have allowed profit margins to reach record levels. The market is closely watching labor trends, in particular wage growth, as higher labor costs could cause margin contraction, pressuring corporate earnings. </p></li><li><p>Experience Insight Impact </p><p>How has the Fed Responded? </p><p>6 </p><p> While the labor picture continues to improve, there are signs that the jobs recovery is not as strong as it appears on the surface. The quality of the recovery remains questionable, as evidenced by low levels of labor force participation and wage growth. </p><p> Nonetheless, the improvements are undeniable and if this trend continues, we expect to see economic improvement in the calendar quarters ahead. </p><p> The Federal Reserve has kept liquidity in the market because the U.S. economy has not yet hit maximum employment (which many believe is closer to 5%) and inflation (particularly wage inflation) has remained benign. </p><p>Investors are closely watching trends in the labor markets for clues on whether the Fed will be forced to raise interest rates sooner than expected. We are monitoring rising wage inflation as we believe this may hinder margin growth and accordingly, impact earnings growth going forward. </p></li><li><p>Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy. </p><p>Experience Insight Impact </p><p>Disclaimer </p><p>7 </p></li></ul>