Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Q
US Productivity Plummets

May 11, 2022

Headline news tomorrow will be today’s Nonfarm Labor Productivity report released by the Bureau of Labor Statistics. The news is the announcement of the greatest annualized decline in labor productivity in the US since the third quarter of 1947! Annualized productivity declined 7.5% in the first quarter of 2022 and was well beyond the projected 5.4% decline that analysts were expecting.
No doubt, this is quite a decline in US labor productivity which measures the growth of labor efficiency in producing the economy’s goods and services. Every company business plan includes improving productivity that both lower costs per unit while improving unit output. As productivity declines, the opposite occurs even without wage increases.  
 
More disappointing information in this report is that while annualized productivity was declining during the last quarter, hours worked increased 5.5% compared to the same time last year. If this trend continues, this would be a double negative for employers with declining production while employees are working longer hours for the same output. Investors have enough to worry about with rising costs and material supply disruptions and now concerns about production and efficiency that is typically a formula for reduced profits. 
 
However, to be fair and to put this report into perspective (something the media may forgo), the US nonfarm labor productivity remains the highest in recorded history; the Bureau has been tracking productivity. Looking at this same economic indicator since the 1940’s, employee productivity and business output has increased steadily for decades as employers defined better process along with the development of new technology.
Unfortunately, investors don’t care about the past and only what may impact future profits and stock price performance. No matter how good the last quarter or years have been for investors, sometimes, with the slightest indication of a decline, they will sell. This is especially true during a correction when investors are already edgy and experiencing portfolio declines. 
 
Probably the worst example of investors dumping a stock of a former darling of Wall Street is Netflix. For decades, Netflix has arduously reinvented itself, proving wrong the naysayers that doubted streaming services vs. video providers like Blockbuster (Block who?) and later its ability to grow its subscribers. Year after year, Netflix beat forecasts of subscriber growth and earnings until last month. In April, Netflix reported for the first time in more than a decade that its subscriber base declined. Investors must have already been aware of this declining trend since last year as the stock price peaked in December and has since plummeted 70.5% so far this year. The stock dropped 35% in one week following its April quarterly report. 
In comparison to the skittish investor, Warren Buffet maintained a long-term perspective, and if he believed in the purpose, goals, and management of the company, he would hold on despite sometimes years of underperformance of the stock price.  
 
Nonetheless, investors have a lot to be concerned about for the stock market and future corporate profits. Last week, the Federal Reserve raised the discount rate by 0.50%, being the largest single rate increase in two decades. The Fed’s concern is inflation rising faster than their target rate and the need to slow down buyer activity. Investors in a weird love/hate relationship with the Fed’s rallied the Dow Jones Industrial Average (DJIA) over 900 points the day of their announcement and then the following three days drove the index down over 1200 points.  
 
In last week’s Brief, we addressed investors’ concern the Fed may raise rates too fast and push the US economy into a recession. Our view is the Fed’s raising interest rates build a necessary margin for future periods when lowering interest rates will be needed. Also, the current market correction is a needed break from a five-year rally, with the S&P 500 rallying 114% through 2021 and NASDAQ 193%.

What Does This Mean to Me?

Despite front-page news of last week’s wild ride and the worst single-day declines of the major indices, the net result for last week was the S&P 500 dropping 3.8% and NASDAQ 5.2%. The US stock market is clearly in a downward trend, and NASDAQ is officially in the bear market territory (down 20% from the previous high).  Although we maintain our favorable long-term forecast for the US stock market and economy, at this time, we continue to grow our cash balances in our portfolios and hold off on new investments until a clear uptrend merges. We would anticipate a bottoming of this correction in the next several months and a new uptrend developing later this year. Corrections don’t occur without reason, and there are plenty of indicators to worry investors. However, as in all past corrections, the downward cycle will end, and a new uptrend will develop. A difference between this correction compared to the real estate bust of 2008 or the dot.com bust in 2000 is the economy and job market are solid. In fact, as reported last week, employers have over 11,000,000 jobs waiting for applicants. Eventually, many of these former employees will return to work, productivity and output will improve, and consumer spending will increase, driving 66% of the US economy.

Give us a call or send us an email with your thoughts about this Weekly Brief. Also, we welcome the opportunity to discuss strategies for you to achieve your goals and navigate through markets like this one to come out on top.

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