Cash and Unemployment Report Reactions

What does the latest unemployment report say about the economy? This article explores reactions from the Federal Reserve, and the Stock Market. It also examines how much cash investors should hold in their portfolios.

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The 9/3/21 Unemployment Report

The Employment Report issued on Friday, September 3rd did little to clarify the direction of the economy or the Federal Reserve. The number of jobs created in August was lackluster.  While non-farm payrolls increased by 230,000 jobs, this was below expectations and well below the 586,000 monthly average job growth in 2021. The Bureau of Labor Statistics increased its July reading by 110,000 jobs, putting the revised July job increase at over 1 million. 

No doubt this was a weak report but the number of Americans working still increased. Hourly wages rose for the 5th straight month.  It appears that the recovery is still happening but there is some sluggishness on the employment front. 

There was a thought that as the extended employment benefits ended, workers would seek work.  The link of employment to extended relief benefits was never established and it appears there are other factors influencing employment. 

Of course, the Delta variant may be a significant reason the jobs report missed the mark.  Companies closed or reduced activity as infections hit their operations.  Workers may be afraid to go back to work.  Parents may be reluctant to take positions without knowing for sure that schools will be open.  Perhaps the reluctance of some workers to go back to work has given other workers some bargaining power, hence the steady rise in hourly wages. 

The Federal Reserve Reaction to the Unemployment Report

Where does leave the Federal Reserve?  They have been signaling that they will be reducing (tapering) the number of bonds they purchase each month.  This report probably does not change their objective. 

The recovery still seems intact and wages are rising.  The case for the Fed supporting the economy seems less warranted than when the economy was in the throws of the pandemic.

The Fed has been purchasing securities (quantitative easing) since the 2008 Financial Crisis.  Now that there is a strong bounce post-pandemic and a new appetite in Washington for fiscal support in the form of infrastructure and social spending, there is probably no better time to taper.  One might ask, “If not now, then when?” 

The Stock Market’s Reaction

However, the stock market did not sell off and interest rates moved up only slightly after the employment report. Is there a thought that the employment picture is not so robust?  Is the market concerned that the Delta variant will put a deeper drag on the economy?  Will the taper be postponed or scaled back? 

Still lots of questions. Caution should be front and center for investors.

How Much Cash Should Investors Hold in Their Portfolios?

There is a debate in the investment community with regard to how much cash investors should hold in their portfolios. 

Moody’s, an economics research firm, calculated that US households had $2.3 trillion in “excess savings” at the end of March 2021.  This level may be elevated due to investors desiring to hold more cash as a result of uncertainties surrounding COVID. 

It is interesting to note that the aggregate amount of cash held by investors has not gone down as the economy is recovering.  As of April 30th, it is estimated that cash represents 17% of US investors’ portfolios. 

Let’s explore some ways to look at cash in a portfolio. 

Too Much Cash

Too much cash in a portfolio drags on returns.

In addition, currently, cash earns close to a zero return, and therefore even low levels of inflation eat away at one’s purchasing power. 

While cash lowers returns, it does provide a sense of safety and security.  This emotional need does have a value.  In the extreme, what good are higher returns if people are so nervous and anxious that they can’t enjoy the fruits of their investments? 

Cash as Having an Option Value

A different view of cash in a portfolio hinges on an investor’s behavior during market slumps. 

If an investor is willing to put the cash to work when the market is down, then one might say cash has a sort of option value on the market.  We all want to “buy low”.  Having cash around to do this is valuable beyond the near-zero immediate return on the cash. 

For an investor with cash and with this perspective, it might help emotionally to put buy orders below the current price for stocks and/or ETFs so the cash seems like it is “working” to catch a correction. 

Cash in an Emergency Fund

Another way to look at the issue is always to have an “emergency fund” with one to two years of expenses and invest the excess.  This allows one to ride out a rough patch like unemployment or illness without selling investments.

It is not good for your long-term returns if you are forced to sell when prices are down.  An emergency fund provides this protection so you can keep more invested for longer.   

What’s Your Reaction to the Unemployment Report?

And what’s your take on how much cash to hold in your portfolio?

Thanks for reading. If we can help you answer investing questions, don’t hesitate to contact us.

The Pendragon Capital Management Team

Click to Download the September 2021 Newsletter

Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.

Image credit: Economie, Daniel Nikolaus Chodowiecki, 1773, etching, h 79mm × w 92mm. Rijks Museum, Netherlands