Without question, this measure of unemployment has shown steady improvement since the end of the recession. However, it is important to recognize that unemployment at 10.3% (U-6) is far worse than the advertised 5.1%; 10.3% is also greater than the pre-recession data point of 8.5% U-6 unemployment.

Unfortunately, U-6 still does not depict the gravity of the problem of unemployment in America. It does not take into account the decline in working-aged individuals who have left the labor force. For the most part, historically speaking, the percentage of working-aged people (16+) in the labor force dropped during recessions, yet recovered alongside as long-term discouraged folks returned to the pool. In the last two recessions, however, this has not been the case.

Many assume, erroneously, this is because older workers in the 55+ and 65+ demographic are baby boomers retiring. Obviously, there would be some of that. Yet the reality of the data is that the only part of the rate that is gaining ground are the older workers in the 65+ demographic. Older people are needing to work longer than they did before. Worse yet, the prime population for workers between the ages of 25-54 are dropping out of the workforce like flies.

There are roughly 94 million working-age people who are neither employed nor making plans to get a job. That is 37.4% of working-aged individuals – a percentage that goes all the way back to 1977. Is it just grandma and grandpa retiring? Nope. It is the dismal circumstances for the 25-54 age bracket where 80.5% are employed – a percentage that has not been this low since 1984.

Whether one describes unemployment as a function of U-6 (10.3%), prime workers between the ages of 25-54 in the labor force (19.5%) or the entire kaboodle via 94 million working-aged people (37.4%), these data points are a far cry from the rosier 5.1% U-3 data point. They also show us that jobs have not actually recovered from the recession yet and/or, in the case of labor force participation, have actually gotten worse. We also know that higher-paying careers have given way to lower-paying jobs over the course of the last two recessions (2000-2001, 2008-2009); median household income has not recovered.

real median income

 

Now, tell me again why the Fed would raise borrowing costs? With prominent global economies already contracting, U.S. manufacturers faltering, U.S. corporate revenue declining, reflated asset prices deflating (e.g., stocks, high yield bonds, etc.), household income falling, wages stagnating, inflation slipping, employment fizzling and real estate failing to inspire?

In September 18’s article, Why the S&P 500 Is Likely To Retest The Lows of 1870, we discussed the reasons why prominent ETFs like S&P 500 SPDR Trust (SPY) had been following the 2011 euro-zone crisis playbook. Indeed, SPY has behaved precisely as we expected.

SPY 2011

SPY 2015

The burning question for investors now? Whether or not the late August lows will hold. Short of a one- or two-day breach of the resistance line, I might expect a buying frenzy to keep bull market dreams alive. However, the longer-term health of the bull market is almost entirely dependent on Federal Reserve policy and the communication of that policy. In particular, chairwoman Yellen and her colleagues cannot rely on merely deferring rate hikes or moving ahead with rate hikes; rather they’d want to communicate the anticipated pace and the anticipated amounts until rate hike conclusion. Anything less than greater clarity on what the Fed is likely to do over the next 6-9 months would be a net negative for risk assets.

Take your cues from the credit markets. In particular, as long as the iShares 7-10 Year Treasury (IEF):iShares High Yield Bond (HYG) price ratio continues to climb, you’re better off with a larger-than-usual cash/cash equivalent balance. When IEF:HYG is falling in a meaningful manner, that’d be the time to think about incremental purchases back into stock assets and other risk holdings.

IEF HYG Price Ratio

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Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationship.