Back to Work for Labor Day! Introducing INFLATION PROOF Investing 1.0 – C.J. Lawrence Market Commentary – September 2, 2022

We had another strong employment report today. August added another 315,000 jobs, ahead of expectations. Labor force participation also rose to 62%, indicating that workers are returning to work. As a result of the higher labor force participation, the unemployment rate rose to a very low 3.7%. This is good news for the U.S. economy and shows we are not in a recession, given the slack in the U.S. economy, with two jobs available for every worker looking for one. 

Last Tuesday, The Job Openings and Labor Turnover Survey – JOLTS report (a monthly Labor Department survey of job openings) rattled markets. It showed that the recent interest rate increases by the Federal Reserve had little impact on the demand for workers in July, a sign that the U.S. labor market remains strong while the Federal Reserve attempts to cool the economy. Job openings ticked up to 11.2 million. The survey included a significant upward revision for openings in June, to 11 million from an estimated 10.7 million.

Following Jay Powell’s speech last Friday at the Jackson Hole conference, where he flexed his inflation-fighting muscles and combined with the JOLTS report, the equity market retraced half of the gains off the mid-June low. This all happened with seasonably low volume and a low VIX, the CBOE’s volatility index. We continue to believe the market sets up well into the year-end, assuming continued gradual declines in headline inflation and the market anticipating a soft landing of the U.S. economy at the end of the current interest rate cycle.

S&P500 chart source: Factset

That said, we are positioning our client portfolios to sustain longer-term inflation levels between 3% and 4% rather than the 1-2% environment we had gotten used to during the last 20 years. For this, we turn to our trusted “INFLATION PROOF” investing playbook, which our Chairman, Jim Moltz, developed in the 1970s, a period marked by persistent inflation and energy shocks. 

In 1979 Jim wrote:

When examining stocks through inflationary eyeglasses, it is important to watch:

  1. Cashflow is the essential element of business managers who believe they are competing against inflation use to see how they are doing.
  2. Return on investment and return on equity are other statistical measures. Returns must be trending up or already well above average.
  3. Sales to gross plant, and its trend.
  4. The various operating margins to sales ratios are relevant.
  5. Dividend payout to cash flow must be checked along with capital spending and debt retirement plans.

Some of our recent purchases in the healthcare, energy, materials, and industrial sectors reflect this inflation-proofing of our portfolios. 

Stay tuned!   

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a by telephone at 212-888-6342.

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