 | All Hail the Bull Market |
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| Posted Under: Bullish • Government • Markets • Monday Morning Outlook • Spending • Taxes • Stocks |
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Today marks the fifth anniversary of the bull market that started back in March 2009, and total returns over the period have exceeded 200%. It was on March 10, 2009 that equities jumped 6% and never again returned to the panic lows set the day before.
Hitting this milestone has many investors wondering how much more time the bull has to run. But instead of thinking in terms of time, we prefer to think about the “kinds of events” that bring the bull to an end, or worse, turn a bull market into a bear market. Right now, the coast is clear.
One way the bull market could end would be a recession. Obviously, at some point, some sort of recession is inevitable. Every other economic expansion in history has come to an end, and this one will, too. But recessions don’t just come completely out of the blue, and none of the typical causes looks ready to strike.
One of the most frequent causes of recessions is tight monetary policy. As our readers know, we do not think QE helped the economy, and therefore we don’t think tapering will hurt it. What the Federal Reserve could do is raise rates to a point where policy became recessionary, but it’s highly unlikely the Fed starts to raise short-term interest rates until 2015. And even when it finally starts to raise rates, monetary policy will not be tight until the funds rate moves to at least 3%, or much higher.
Tax hikes could also cause a recession, but it looks unlikely that any more tax hikes will be enacted in the US until at least 2017. Tax reform is making news, but not tax hikes unless you want to talk about Japan.
Trade protectionism, like the Smoot-Hawley Tariff Act, can cause recessions. Right now the Senate is holding up some free trade deals from passage, but the agreements we already have aren’t going away.
Nor do those who think debt itself can cause a recession have reason to fear. Household financial obligations (the share of income needed to make monthly recurring payments on mortgages, leases, autos, student loans, credit cards,…etc.) is the smallest share of income since the early 1980s. And, the corporate debt-to-equity ratio remains low.
Some fret about a spike in oil prices, but US petroleum imports are now only about twice exports, as opposed to ten times exports, like in prior decades. The US is much less vulnerable to higher oil prices because it earns so much more from producing energy.
Another financial panic that spreads to the economy could obviously end the bull market. But overly strict mark-to-market accounting rules were neutered five years ago, and started this bull market. With sane mark-to-market rules in place today and bank capital ratios much higher, another panic is not in the cards.
Finally, a huge expansion in government could end the bull, like in the late 1960s. No recession, no financial panic, but the Great Society expansion of government after a long and strong extended bull market pushed stocks into a 17-year funk. In a way, that is what happened over the past 14 years. But government spending is now declining as a share of GDP, President Obama looks like a lame duck, and the political winds are blowing in a different direction.
Overvaluation isn’t a problem either, with equities still cheap relative to fundamentals. Even if 10-year Treasury yields were to rise to 4.5% (from their current level of 2.8%), our capitalized profits model still says the S&P 500 is 28% undervalued, and that’s even if we assume zero growth in profits during 2014.
So, while the bull market is no spring chicken, age itself is no reason to fret. From both a valuation and a “threat” point of view, it still has a way to run. All hail the bull market. It's great friends with the Plow Horse Economy.
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| | Nonfarm Payrolls Increased 175,000 in February |
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| Posted Under: Data Watch • Employment |
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Implications: Despite atrocious winter weather in February, nonfarm payrolls posted a solid and above-consensus gain of 175,000. Private-sector payrolls were up 162,000. Not all of the report was as good as the top-line payroll numbers, but we think the weather is the main reason and so expect better reports in the months ahead. The unemployment rate ticked up to 6.7% from 6.6% in January. The increase in the jobless rate was the result of a 264,000 increase in the labor force (good!) alongside only a 42,000 gain in civilian employment, an alternative measure of jobs that includes small-business start-ups. However, the same survey said 601,000 people missed work due to bad weather, compared to an average of 357,000 over the previous ten Februarys. In other words, if weather had been typical in February, civilian employment would have been up about 250,000 – 300,000 and the jobless rate would have stayed at 6.6%, very close to the Federal Reserve’s 6.5% threshold for starting to discuss rate hikes. As a result, look for the Fed to change that threshold at its meeting on March 19, but keep tapering firmly on track. The best detail from today’s report was the 0.4% increase in average hourly earnings, the largest in eight months. As a result, despite the weather helping push down hours worked by 0.2%, total cash earnings for all workers combined were up 0.2%, which means more increases in consumer spending. Part-time employment fell 209,000 in February, is down 703,000 in the past year, and is now the smallest share of employment since October 2008. Hopefully this will silence the pessimists who were contorting that data series in 2013 to spin a negative story. And while the headline unemployment rate ticked up slightly, the U-6 unemployment rate dropped to 12.6% from 12.7%. As we always remind our readers, the labor market could and would be doing better with a better set of public policies. But it is still improving. In the past year nonfarm payrolls have grown at an average monthly rate of 180,000 while civilian employment is up 150,000 per month. We expect an acceleration in the months ahead. The plowhorse economy is still moving forward.
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| | The Trade Deficit Came in at $39.1 Billion in January |
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| Posted Under: Data Watch • Trade |
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Implications: The US trade deficit slightly increased to $39.1 billion in January, as imports grew slightly faster than exports. Fracking and horizontal drilling continue to transform not only the US energy industry but also our trade with the rest of the world. Eight years ago, back in January 2006, the US imported 12.5 times as much petroleum product as it exported. Since then, petroleum product exports are up more than 500% while imports are up only 26%. So now, petroleum product imports are only 2.5 times exports. If this trend continues, and we strongly believe it will, the US will be a net petroleum product exporter by late 2016, sooner if we fix our pipeline and refinery issues. Outside of energy, the trade deficit has generally grown over the past four years of recovery, but has recently leveled off. Normally, when the US economy grows consistently, our trade deficit tends to expand. However, because fracking has unleashed a massive supply of natural gas, the US has an energy cost advantage versus many of the advanced nations around the world. So, even though natural gas prices have increased of late and even if we start exporting more natural gas, we should maintain a competitive advantage versus many of our major trading partners. This, plus the direct effect of more energy exports and fewer imports should help suppress any expansion in the trade deficit relative to the size of the economy.
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| | Nonfarm Productivity Increased at a 1.8% Annual Rate in Q4 |
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| Posted Under: Data Watch • Employment • Productivity |
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Implications: Productivity growth in the fourth quarter was revised lower to a 1.8% annualized pace, consistent with last week’s downward revision to real GDP. Despite the weaker Q4 number, productivity has been increasing, up 1.3% from a year ago compared to only 0.8% in 2012. Still, the recent slower gains in productivity are noticeably smaller than the 2.3% annual average since 1996. However, we do not think the productivity revolution has come to an end. Since the end of 2008, productivity is up at a 2.0% annual rate, not much different than the longer term trend. Our best guess is that as the unemployment rate continues to decline, companies will orient themselves more toward increasing production by finding ways to increase efficiency. We would have to see productivity stagnate for at least another couple of years before being able to reach any conclusions about a structural downshift in its growth rate. For now, the long-term trend in productivity growth should remain healthy, due to a technological revolution centered in computer and communications advances. Manufacturing productivity, which is easier to measure than overall productivity, is still up at a 2.7% annual rate in the past five years. We expect further gains as manufacturing will continue to be a bright spot in the US economy for years to come. In other news this morning, new claims for unemployment insurance declined 26,000 last week to 323,000. Continuing claims for regular state benefits dropped 8,000 to 2.91 million. Plugging all these figures into our payroll models, our final forecast for February is a gain of 164,000 nonfarm and 163,000 for the private sector. The official Labor Department report will be released tomorrow morning and our projections are slightly above the consensus of 147,000 nonfarm and 150,000 private.
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| | The ISM Non-Manufacturing Index Declined to 51.6 in February |
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| Posted Under: Data Watch • Employment • ISM Non-Manufacturing |
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Implications: After a surprise on the upside from the ISM manufacturing report, today’s ISM service sector report surprised to the downside. Although, at 51.6, the report still showed expansion in the service sector, the report came in below consensus expectations. The business activity index – which has a stronger correlation with economic growth than the overall index – dipped to 54.6, a level that continues to signal solid economic growth. The worst news in today's report was an 8.9 point decline in the employment index, to 47.5. After hitting a three year high last month, the employment index now stands at its lowest level since March of 2010. Many of the industries reporting a slowdown in employment; mining, real estate, and entertainment & recreation, to name a few, were hit hard by continued unusually cold (and snowy) weather. As the cold season comes to an end, expect employment in these industries to pick back up as companies and consumers make up for lost time. On the inflation front, the prices paid index dropped to 53.7 in February from 57.1 in January. Still no sign of runaway inflation, but given loose monetary policy, we expect this measure to move upward over the coming year. In other news this morning, the ADP index, a measure of private payrolls, increased 139,000 in February. Plugging this into our payroll models brings our forecast for the official report on Friday to 151,000 nonfarm, 150,000 private. (Tomorrow’s report on unemployment claims may alter this forecast slightly.) In other recent news, sales of autos and light trucks increased 0.7% in February but were unchanged from a year ago. Look for faster gains in the months ahead as buyers make up for shopping days lost to bad weather.
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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