Dueling Data Points: Unemployment and Housing

Two data releases Thursday illustrate the Federal Reserve’s dilemma, along with that of investors in general. Namely, where is the economy going?

The year’s first two quarters showed shrinking gross domestic product, a longstanding rule of thumb heralding a recession. Several other economic data points have backed up that diagnosis. Other indicators, however, point to continued prosperity.

Result: a muddled picture. Perhaps that accounts for the stock market’s middling performance Thursday. The S&P 500 nudged up just 0.23%, a muted showing compared with its rally since mid-June.

The Fed is wrestling with the pace of its rate-hiking drive, a campaign that is aimed at curbing high inflation. Esther George, president of the Kansas City Fed, said in a public appearance Thursday that the central bank’s policymaking panel (on which she sits) is aware that it doesn’t want to tighten too much. Fed chief Jerome Powell has said that the tempo of the rate raises depends on the data.

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Weekly unemployment compensation claims dropped last week, to 250,000, some 2,000 less than the prior week’s level, which itself was revised down. That obviously is a positive signal, following other encouraging signs, such as robust industrial production and retail sales in July.

“Ultimately the strength of the labor market is what is going to keep the economy growing,” says Chris Zaccarelli, CIO for Independent Advisor Alliance.

On the negative end of the spectrum, existing home sales dipped last month, down 5.2% from June and 20.2% from July 2021. Housing is an important part of the economy, and the sales slide is the most recent indication that the once-soaring housing market is losing altitude fast.

Home-building is also dropping, along with mortgage applications as loan interest rates increase. “A slowdown in housing has real economic impacts across the economy,” says Jeffrey Roach, LPL Financial’s chief economist.

Home sales prices remain high, in part thanks to a shortage that stems from cautious builders’ pullbacks following the 2008 housing bubble burst. The median existing-home sales price climbed 10.8% from one year ago to $403,800. That’s down $10,000, though, from last month’s record high of $413,800.

Consultants, long a key part of asset allocators’ planning, are likely to be even busier up ahead. Over the next two years, 22% of allocators expect to use consultants for the first time and 13% expect to increase their existing usage, according to a Cerulli Associates survey.

Over the same period, 53% plan to utilize them at the same rate as today. That leaves a mere 12% who don’t intend to employ consultants.

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“Even smaller clients that typically did not use consulting services are likely to see value in their expertise as the markets and the investment landscape grow more complex,” said Laura Levesque, a Cerulli associate director, in a statement.

There’s little doubt that asset owners increasingly rely on consultants. Another survey of allocators, by Greenwich Associates, found that 80% of them in 2021 counted on consultants as their primary source of investing advice, up from 71% the year before. For instance, in March the California Public Employees’ Retirement System chose Wilshire Advisors as its consultant for the pension plan’s private debt, which it had recently added as a new asset class.

What’s behind the growing popularity of consultants? That many allocators need help incorporating environmental, social and governance principles into their portfolios is one reason cited by Cerulli, which itself is a big presence in the consulting field. Another factor: the greater volatility of markets in the pandemic-ridden world.

Meantime, 77% of Cerulli survey respondents indicated that the major topic they discuss with consultants is reevaluating asset allocation. Other top issues are portfolio risks (67%), portfolio holdings (69%) and capital markets expectations (68%).

A big concern about the allocator-consultant relationship, per the survey, is the hybrid work arrangement so prevalent in office culture nowadays. The Cerulli report notes that lately, “strategies that have worked the best in the past, such as meeting with manager research team members in their office, are harder to rely on.”

“The pandemic has had a significant impact on how many consultant relations teams are able to interact with investment consultant contacts,” Cerulli’s Levesque said. “Consultant relations teams are working hard to adapt to continue building those important relationships.”