Economic Outlook: What’s the True Meaning?
- The big data release last week was the Employment Report. For the most part, compared to expectations, it was disappointing. We saw 142,000 jobs created and some negative revisions to the reports for the previous two months.
- The unemployment rate held unchanged at 5.1%. The “underemployment” reading, however, did decrease 0.3%. We did not see an increase in Average Hourly Earnings, though it also held constant, and did not decrease.
- A closely related data point is Initial Jobless Claims. The Jobless Claims 4 week moving average remains in a range that is quite low at 271,000. Of all the payroll data, Jobless Claims are the most important leading indicator.
- There are some contrasting indications in the Jobs and Employment data. The key question, in our judgment, is how meaningful is this? To assess the importance of an isolated data point, it is important to position it in the context of the totality of the available data. What other things are we seeing currently?
- The Bureau of Economic Analysis reported that Personal Income and Consumer Spending were both positive, increasing 0.3% and 0.4% over the previous month.
- In addition, the Conference Board released its survey. Consumer Confidence rebounded and registered at 103, up from 101.5, and all of that despite considerable volatility in financial markets.
- Markit released their gauge of national manufacturing. The PMI Index came in at 53.1, still solidly in the growth zone. ISM’s similar measurement was more marginal at 50.2, though still in the growth area. It appears in drilling down on the data that domestic energy production is finally responding to the lower price environment and slowing down. This seems to be influencing the data measurements.
- While the energy data is soft, construction spending showed a nice bounce though, and is now up 0.7% in August, over the previous month, and up 13.7% from twelve months ago. This is reflecting a strengthening housing market that we’ve been discussing in the past several weeks.
- Looking abroad, the EU Commission’s measure of economic sentiment was also stronger than expected in September. The sentiment index climbed 1.5 points to 105.6, its largest increase since March. This measure now stands at its highest reading since mid-2011.
- Markit’s measure of PMI Manufacturing data held steady at 52. While this is not a blow-out result, it continues to reflect the consistent improving trend in the Euro-zone.
- Is there a conclusion in all this? Here’s our reading. This looks like a “soft patch” in the jobs data. We have seen these before – occasions where the economy endures a brief soft patch without tripping into recession. It has actually happened pretty frequently. 1994, 1998, 2006, 2011 to cite a few examples in recent years. We continue to believe the data supports a forecast of steady, if not spectacular, economic expansion.
Equity Markets: A “Melt-Up”?
- Three days don’t make a market, obviously. However, the first two trading days of October were strong and as we write this on Monday, the third trading day of the new quarter is looking strong as well.
- Despite opening lower Friday on the jobs report news discussed earlier, equity markets rallied strongly through the close on Friday to finish the week with a gain. That’s a first for the past few weeks. And of note, emerging markets performed the best.
- On all six fundamental valuation measures (Forward PE, Shiller PE, Dividend Yield, Price-to-Book, Price-to-Cash Flow, and Earnings Yield), the S&P 500 Index closed the third quarter under-valued from its twenty five year average levels. The markets are not characterized by excessive exuberance. Pessimism may be what is over-valued. Could we possibly experience a “melt-up”?
- What has gotten all the attention in the financial headlines is that earnings estimates for the third quarter are negative for the S&P 500. However, if you strip Energy out of the calculations, Q3 is positive both on revenues and bottom-line earnings. That is not a sign of a corporate world hard up for results.
- And it is noteworthy that while we’ve had volatility in recent weeks, both the Dow and the S&P 500 have successfully retested their previous correction lows.
Fixed Income Markets & the Fed: Fear of Rising Rates?
- Last week, the yield on the 10 Year Treasury note softened considerably. At the end of the week, the yield on the 10 Year closed at 2.01%. This is down from the previous week’s close at 2.16%.
- Hard to predict if the Fed will in fact move before year-end. However, history suggests to us that a slight move up in rates by the Fed is unlikely to have a major effect on equity returns. Historically, when the 10 Year Treasury yield is below 5.0% (at 2.01% now), rising yields are generally correlated with positive returns on stocks.
The Week Ahead
- EU, PMI Composite (Markit)
- U.S., Consumer Credit
- U.S., FOMC Minutes Released