at Record Highs but is There a Disconnect from the Economy?
By the Curmudgeon
With the giddy U.S. stock market making new highs almost daily, in an ongoing stupendous rally since the beginning of November (Russell 2000 up over 18% that month), we once again take the pulse of America’s economy and let the reader determine if there is a “disconnect” between the market and the real world.
We summarize the Fed Beige book findings and assess Friday’s BLS employment report, including commentary from John Williams of ShadowStats. Next, we provide the current status of the U.S. Corona Aid bill that is in a race against time so that it’s passed before benefits run out at the end of December.
Finally, we present a very bullish economic assessment/outlook from Bank of America Research which believes the global economy is in a new upcycle, despite the recently renewed lockdowns (like the “draconian” stay at home order in the SF Bay Area and most of the rest of California).
Most Federal Reserve Districts in November characterized economic expansion as modest or moderate. However, four Districts described little or no growth, and five narratives noted that economic activity remained below pre-pandemic levels for at least some sectors. Moreover, Philadelphia and three of the four Midwestern Districts observed that activity began to slow in early November as COVID-19 cases surged.
Banking contacts in numerous Districts reported some deterioration of loan portfolios, particularly for commercial lending into the retail and leisure and hospitality sectors. An increase in delinquencies in 2021 is more widely anticipated.
Employment rose in most Districts, but the pace was slow, at best, and the jobs recovery remained incomplete (see Jobs Recovery Stalls below). Firms that were hiring continued to report difficulties in attracting and retaining workers. Many contacts noted that the sharp rise in COVID-19 cases had precipitated more school and plant closings and renewed fears of infection, which have further aggravated labor supply problems, including absenteeism and attrition. Providing for childcare and virtual schooling needs was widely cited as a significant and growing issue for the workforce, especially for women—prompting some firms to extend greater accommodations for flexible work schedules. In several Districts, firms feared that employment levels would fall over the winter before recovering further. Despite hiring difficulties, firms in most Districts reported that wages grew at a slight or modest pace overall. However, many noted greater pressure to raise rates for low-skilled workers, especially in outlying areas. Staffing firms described greater placement success with competitive rates, and one firm instituted a minimum wage rate for its industrial clients.
U.S. Jobs Recovery Stalls:
U.S. job growth slowed sharply in November, suggesting the labor-market recovery is losing steam amid a surge in coronavirus cases and new business restrictions. U.S. employers added 245,000 jobs last month, down about 60% from the 610,000 jobs added in October, the BLS reported on Friday. The unemployment rate edged down slightly to 6.7% in November from 6.9% a month earlier, but that was mostly because fewer Americans were seeking work.
The labor market has now regained 12 million of the 22 million jobs lost at the onset of the pandemic. At November’s pace of job growth, employment wouldn’t return to pre-pandemic levels until 2024, Glassdoor senior economist Daniel Zhao said.
“We saw positive job gains, but I think the sentiment is largely negative because we know that we’re heading into a dark winter. There is a long way to go before we actually have a vaccine in hand and make a full economic recovery,” Mr. Zhao said.
ShadowStats’ John Williams wrote:
The “Jobs “Recovery” has stalled in “Non-Recovery” mode, with monthly year-to-year declines in total Payrolls holding steady at 6% (-6%) (December 4th, Bureau of Labor Statistics - BLS).
As suggested here last month, “... Payroll Employment improvement continued in sharp deceleration, with the pace of annual decline leveling off around 6% (-6%) in an “L”-Shaped economic recovery.” Meaningful quality and credibility issues continue to plague the “improving” headline labor numbers. November payroll jobs gained for the seventh month, up by 245,000 [256,000 net of revisions] month-to-month, well shy of expectations, and well below slowing monthly paces of 711,000 in September and 610,000 in October, with the rate of annual decline leveling off at 6.0% (-6.0%) in both October and November, having declined by 6.4% (-6.4%) in September. Industry payrolls in the key sectors such as Retail Sales and Manufacturing showed deepening annual contractions, with no economic recovery to pre-pandemic levels in sight.
The BLS acknowledged continuing misclassification of some “unemployed” persons as “employed,” in the Household Survey. An estimated “upside limit” of 629,000 persons in November, up from 562,000 in October, was indicated as the potential number of “employed,” who more properly should have been counted as “unemployed.” That reduced a potential November 2020 U.3 headline unemployment rate of 7.1% to the published headline 6.7% (6.69%).
It’s important to note that the U.S. work force (proportion of Americans who are either working or seeking work) fell in November, suggesting that many people soured on their prospects for finding a job and stopped looking. The labor participation rate declined to 61.5%, a level that before the pandemic hadn't been seen since the 1970s.
Will Congress Pass a Coronavirus Aid Package this Year?
Two U.S. federal unemployment benefits programs are set to expire at the end of December — just as viral cases are surging and lockdowns (like that in California) are shutting down indoor and outdoor shopping and restricting travel. Unless Congress enacts another rescue aid package, more than 9 million unemployed people will be left without any jobless aid, state or federal, beginning after Christmas.
Despite endless discussions, Congress has yet to pass a new rescue aid package. A new $908 billion proposal is expected to be discussed this week. It’s seen as a last-ditch effort to bring sorely needed economic aid (like extra unemployment benefits and money for small businesses) before year’s end.
"With so many of these initiatives from the first CARES package running out as soon as the day after Christmas, it would be what I call stupidity on steroids if Congress doesn't act," Sen. Mark Warner, a Democrat from Virginia and member of the bipartisan group that wrote the proposal, said Sunday on CNN's State of the Union.
B of A Proprietary Indicators Show Global Economy Getting Stronger:
While concerns abound about the rising number of COVID-19 cases in the U.S. and vaccine execution risks, the latest update of B of A Research suite of proprietary indicators shows that the economic recovery is gaining momentum (as of November 29th).
87% of the 38 growth indicators are flagging a Bullish/Neutral signal now, the highest level since February, 2019, up from 76% last month.
This is shown in the chart below:
B of A says the breadth of growing manufacturing PMIs echo this boom: 32 out of 41 countries (78%) see their PMIs in the expansionary zone (above 50), the highest level since October-2018. That’s depicted in this chart:
The improvement is reflected in analysts' earnings estimates. Global monthly earnings revisions ratio soared to 1.30 in November, with upgrades outnumbering downgrades in every region, most global sectors, and all global styles. And that’s illustrated below:
In light of the above, B of A concludes that the bull market in equities remains intact. However, the firm expect a disorderly yet continued rotation into value/cyclicals/small-caps/EMs. The key risk to the markets is a deceleration in global liquidity (will global central banks forever backstop financial markets?).
· B of A Research Chief Investment Strategist Michael Hartnett sees transitions from virus to vaccine, lockdown to reopening, recession to recovery and a rotation rather than a rally as Main Street outperforms Wall Street. He would lighten positions as vaccines spread and favors stock picking over indices, commodities over credit, commercial over residential real estate, high yield over investment grade, and emerging markets over the U.S.
· Head of US Equity & Quantitative Strategy Savita Subramanian also sees a lot of optimism priced in stocks, making markets vulnerable to a near term correction, but she prefers stocks over bonds given the S&P 500 dividend yield is about twice that of 10 year treasuries.
Most experts say the economy and job market won’t be able to fully recover until the virus can be controlled with an effective and widely used vaccine. One with no harmful side effects and efficacy tested over a larger sample size. Sadly, the picture could worsen before it improves.
“The recovery is not insulated from the effects of the pandemic,” said Mr. Zhao of Glassdoor. “This is the calm before the storm. We face a long and difficult winter ahead."
Good health, stay calm and safe, persevere under lockdowns and till next time….
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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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