Beige Book Observations

At 2 p.m. ET today, the Federal Reserve (Fed) released the latest edition of the Beige Book.

The Beige Book compiles qualitative observations made by community bankers and business owners about economic and banking conditions in each of the 12 Fed districts. The report is much more “Main Street” than “Wall Street” focused, and provides an excellent window into economic activity around the nation using plain, everyday language.

LPL’s John Canally noted that: “We agree with the market’s assessment that the odds of a Fed rate hike at the November meeting are low—in part because the November meeting (November 1-2, 2016) comes less than a week before the U.S. Presidential election (November 8, 2016)—but today’s Beige Book keeps the Fed on track to hike rates at its final meeting of 2016 on December 13-1 4, 2016.”

The report is prepared eight times per year, ahead of each of the eight Federal Open Market Committee (FOMC) meetings. The next FOMC meeting is November 1-2, 2016. The data for this edition of the Beige Book was collected through October 7, 2016, which includes the first presidential debate on September 19, 2006 and the vice-presidential debate on October 4, 2016, and of course the nonstop media coverage of the campaign. There were 10 mentions of the upcoming presidential election and/or politics in the October Beige Book, almost all in a negative context, versus eight in the September Beige Book. We expect the election to continue to be a part of the Beige Book set to be released in late November ahead of the mid-December FOMC meeting, as respondents react to the election outcome.

Sentiment Snapshot

To evaluate the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) (see the figure below), which is a diffusion index that measures the number of times the word “strong” or its variations appear in the Beige Book less the number of times the word “weak“ or its variations appear. When the Beige Book Barometer is declining, it suggests that the economy is deteriorating. When the Beige Book Barometer is rising, it suggests that the economy is improving.
10-19-16_blog_fig1_1-3
In October 2016, the barometer ticked down to +41 after the +55 reading in September and the +61 reading in July 2016. At +44, the September 2016 reading is now back at the low end of the range it has been in since early 2012. All of the deterioration in the current Beige Book versus September’s came outside of the three Fed Districts in the nation’s oil patch (Minneapolis, Dallas, and Kansas City), where sentiment got a much needed boost from a pickup in oil production in the past few months. Our Oil States Barometer moved from +7 in September to +9 in October 2016, in line with the +8 reading seen, on average, in the 12 Beige Books ending in June 2016, which coincided with the worst of the declines in oil prices and production. The +9 reading on our Oil States Barometer in October was even more disappointing given that the +21 reading in July 2016 put sentiment in these districts back to a level not seen since prior to the peak in oil prices in June 2014. Sentiment outside the oil patch dipped from +48 in September to just +32 in October, the lowest reading in more than two years.

The “inflation words” in the Beige Book (wage/skilled/shortage/widespread/rising) totaled 117 in October, up from 108 on average per Beige Book in the first half of 2016, 98 in 2015, and 80 in 2011-2014. In short, while the uptick in inflation words in the latest Beige Book is not an indicator of runaway inflation, it does provide the Fed cover to act soon to lift rates off the near-zero levels they have been at since 2008.10-19-16_blog_fig2_1-3

Please see our Weekly Economic Commentary (September 12, 2016) for more insights into the Beige Book.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor
Member FINRA/SIPC

Tracking # 1-547180 (Exp. 10/17)

 

Where Were You on Black Monday?

On the 29th anniversary of Black Monday* this week, we opened it up to the LPL Research team and asked what they remembered from this fateful day. Here’s what they had to say:

Jeff Buchbinder – “I was in high school and remember my broker (who is also my father) being overseas at the time—conveniently missing the excitement back at the office. I’ll never forgot what he told me after the crash, which was stay patient, stocks are too cheap to sell, and we’ll get it back before too long. Well, sure enough, in less than a year his clients’ accounts were back to pre-crash levels. A good early lesson in investing for the long term.”

John Canally – “I was working as a Research Assistant at the Congressional Budget Office in Washington, DC. We had one Telerate or a Quotron machine in the office, and many people gathered around it all day long. My dad worked at a regional brokerage house at the time, and he was at work until very late that night (1 AM) catching up on all the paperwork the day brought. From a macro standpoint, there is a great story about that day.  The story goes that Greenspan – who had just taken over at the Fed in August – had traveled to Dallas the day before for a speech. He left in the afternoon when the market was down, but hadn’t crashed yet. Later that evening a senior officer from the Dallas Fed told him the market had closed down “five-oh-eight.” He thought the Dow was down five points. Of course, it was actually down 508 points or 22%.”

Matthew Peterson – “On the day of the October 1987 market crash, I was unaware of what happened and was surely going about my business doing whatever I did as a college sophomore. I recall walking through the Student Union and going past the lounge with the big TVs in them and seeing the story on the 6:30 network news. I think of how much our lives have changed. In 1987, most of us got our news from a scheduled televised newscast. There was no immediate feedback loop, no social media commentary and the unavoidable political spin that now shapes everything. I would have had to find a payphone to call home to talk to my parents about it; I probably didn’t. Even just 20 years ago, things were much slower than they are today. Such an event today would have very different ramifications. We all have the ability to say so much more, so quickly. Whether we actually have more to say remains a question.”

Ryan Detrick – “I had no idea this even happened, as in the third grade my biggest worry was if we were playing basketball or football at recess.”

For more color on whether another Black Monday could happen in 2016, be sure to read yesterday’s blog, “Is Another Black Monday Coming?”

 
*Black Monday refers to the global stock market crash of Monday, October 19, 1987.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-546860 (Exp. 10/17)