Revisionist History

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

With the dawn of this year's football season upon us, the musings for this week will be football-related. While waiting for Powell's much-anticipated comments at the Jackson Hole Symposium, economic data has been at the forefront of investors' minds. One of the more important revelations has been the release of the revision to labor market data for the past 13 months. This week's musings are inspired by the 1993 movie, "Rudy". The film has become more popular in sports movie lore than at its initial release. Here's some trivia about the film:

The film had a meager budget of $13 million and only scored $22.8 million at the box office. In 2005, after the film's aftermarket success, ESPN listed it as one of the top 25 sports movies of the last 25 years.
In the movie Rudy approaches Coach Parseghian to ask if he can dress out for one game. The game film Parseghian is watching at that moment was the actual game in which Rudy played.
The real life teacher's assistant that Rudy befriends in the film, D-Bob, plays the cameo role of a bartender in the movie.
Unfortunately, the film is rife with inaccuracies - Hollywood...who would have thought? The scene at the end of the film where the crowd is chanting Rudy's name - never happened. The crowd did not cheer for Rudy to be put into the game. The scene where the players place their jerseys on the coach's desk - never happened (see below). Rudy working in the steel mill - never happened. Rudy actually enlisted in the U.S. Navy for four years after high school.
Dan Devine, the coach whose desk is littered with jerseys in order to let Rudy play was actually very supportive of Rudy. It was his idea to let Rudy play in his final game. To his chagrin, Devine agreed to let the film paint him as the "villain" because he considered Rudy a friend.

Here's what we've seen so far this week..

Revisionist History. Like the producers of the film "Rudy," the Bureau of Labor Statistics has decided that accuracy isn't a necessity, but more a luxury. After data from April 2023 to March 2024 suggested that the labor market was strong, the BLS decided to revise the jobs added during that period lower by approximately 818,000. In fact, it's the 2nd largest downward revision to payrolls since 2009. That's a major shift in the data. Of the more than 2.7 million jobs added over that period, the revision to the data accounts for approximately 30% of those added jobs. This paints a different picture as to the health of the current labor market. This week, just as last week, the Fed has been playing loose with their language once again. FOMC Board member Bowman stated this week, "It is possible that the strength of hiring has been overstated." You think? There is evidence that the Philadelphia Federal Reserve knew about the massive revisions several months ago. Not only is it "possible" that strength of hiring is overstated, their own data proved it. As such, the markets show a 75 probability of a 25 basis points rate cut next month. And yet, Philly Fed governor Harker stated this week, "I'm not in the camp of 25 bps or 50 bps cut, I need more data." Ok, here's some more data from the housing sector. The number of pending homes that fell out of contract was the largest amount in the month of July on record. This is a concern as housing affordability is near all-time lows despite the fact that the yield on the 30-year mortgage has declined from 7.80% last year to 6.46% as of yesterday. The data point to watch going forward is the number of jobs added in the construction and real estate sector. As in 2008, the amount of jobs gained/lost in that sector can drive results for the overall economy. While we don't support an overly aggressive rate cutting cycle, the reality is that the Fed missed the opportunity to gradually begin cutting rates months ago because they were too focused on inflation that got out of hand due to a supply anomaly.

Chasing Down A Dream. A great scene in the movie "Rudy" involves the priest who helped Rudy get to a chance to enroll at Notre Dame and Rudy's frustration it hasn't happened yet. Father Cavanaugh tells Rudy, "Well, you've done a hell of a job kid, chasing down your dream." That's what we, as financial advisors, are responsible for doing - helping people chase down their dreams. We have to help clients remember that it's about the long-game and not to get too focused on the short-term. When we look at the history of Bull and Bear markets, clients should realize the upside is more powerful towards compounding returns than the downside is toward eliminating returns. That being said, our job is to also remind investors that sometimes it's important to see when shifts are occurring and when it's time to adjust. This morning at the Jackson Hole Symposium, Fed Chairman Powell basically signaled the green light for rate cuts next month when he stated, "The time has come for policy to adjust." What investors need to look at now is how to adjust portfolios that are tactical with the change in interest rates. Sectors that do well during falling interest rates are Defensive sectors and those that under-perform during falling rates are more Cyclical in nature. We can see this in how the consumer tends to spend. For example, eating meals out is an example of discretionary spending. We have seen restaurant spending decline over the last three years, meaning that the consumer has adjusted to higher inflation and higher interest rates on credit cards. While Redbook Sales have hardly slowed, the consumer is more cautious in spending habits and has adjusted to a different economic climate. While we're not hitting the panic button yet, there is further evidence that a slowdown may be ahead. The Atlanta Federal Reserve has lowered their estimate of 3rd quarter GDP from +2.9% two weeks ago to +2.0%. In addition, the number of US workers who expect to become unemployed over the next 4 months moved to the highest level in 10 years. Now, this is a survey, so it should be taken as such with regard to any recession probability. But, it is likely to affect consumer spending in the coming months. Either way, it makes sense for investors to at least become less aggressive when selecting equity sectors moving forward.

The authentic video of Rudy's famous sack...
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