Iran rejects U.S. war proposal, says no talks before conditions met
In Monday’s Commentary, we alerted readers that the dollar could be setting up for a reversal higher. Furthermore, we noted that if such a turn comes to fruition, some investors may encounter surprises. To wit:
As such, investors should examine their portfolios for risks that have developed with the reversal of the previously overbought dollar, to now very oversold.
Such reversals are often the thing that surprises complacent investors the most.
A few readers asked us what assets are most at risk, especially if such a dollar appreciation is rapid. The easy answer is gold, as it, along with many commodities, tends to have a negative correlation with the dollar. The graph below shows the inverse relationship between gold and the dollar over the last three years. Beneath the price graph is the running 50-day correlation. This confirms what our eyes see in the price graph: gold has been rising while the dollar has been declining.
The following bar chart examines gold and other, more speculative assets that have performed well recently. This will help further answer the question of which securities are at risk if the dollar turns upward. As shown, on a year-to-date basis, gold, gold miners, and silver exhibit the most negative correlations. Next in line is Bitcoin. Lastly, the better-performing stock market sectors show a negative correlation, albeit one that is less pronounced than that of the precious metals and Bitcoin. Ethereum has the lowest correlation among the assets we chose.
ADP, JOLTS, And Tax Withholding
If the government shutdown continues through Friday, the BLS will not release the September employment report. While that report is one of the most important for investors and the Fed, there are plenty of other sources that can help us gauge what has been occurring in the labor markets since the last BLS report. Let’s look at a few of them.
ADP: ADP reported that the number of jobs fell last month by 32k. The market was expecting a gain of 50k. Equally concerning, the prior month was revised lower by 57k jobs to -3k. Three of the last four months have now seen job shrinkage. The only other negative ADP print since COVID was in 2023, when they reported a loss of 53k jobs. This report suggests that the BLS is likely to report negligible job growth when it releases its monthly report. A negative print with further downward revisions would not be surprising.
JOLTs: Job openings, which soared in 2021-2023, have fallen ever since. At 7.2 million, they are roughly in line with the peak existing before the pandemic. They should be higher given that the economy has grown substantially since then. However, the data can be somewhat flawed, as many companies advertise for employees but do not necessarily fill the jobs. The bottom graph in the second graphic is disturbing. It shows that there are now more unemployed people than job openings. At .98, the ratio is decently below the pre-pandemic rate of 1.25. This data aligns with continuing unemployment claims, which indicate that those recently laid off are having difficulty finding new employment.
Tax Withholding: The second graph below shows that IRS tax withholding, adjusted for wage inflation, has been running slightly above last year’s levels. Assuming that job growth is rising, we would expect a decent gap between the weekly figures for each year. This is evident in the differences between 2022 and 2023, as well as between 2023 and 2024. The fact that 2025 is running barely above 2024 tells us job growth has been minimal.
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