Boy did I have that one wrong. The idea that we might have back-to-back weak jobs reports was blown out of the water right after I hit the send button Friday morning. The jobs report was not only positive for June but it added back more jobs from previous downward revisions.
Needless to say, the markets liked it as we witnessed the averages take back anything left from “Branic” (Brexit Panic) and then some. Just a few points away from new all-time highs and the markets have left many pondering why. I can hear a chorus of fear-mongering experts repeatedly asking, “How could this be happening with all of the bad news out there?”
The same reason it has happened repeatedly at important times in history: in 1982, or October 20, 1987, in early 1992, late 1995, late 1998, March 2003 and March 2009. It happened all those times – and on Friday – because the future is set to be far brighter than our fears currently define.
The only problem?
Friday’s action suggests our hoped-for summer swoon better get here pretty quickly. Soon, we may be left to accept that our summer swoon for 2016 was two days long – and over – 48 hours after Brexit. Pretty funny – I may not have been bullish enough!
Some Stats Please?
Digging a little deeper into the jobs data, we find one of the more important aspects are income levels. As all can see, the jobs data has gotten a bit more choppy lately along with everything else. Payroll employment rose 11,000 in the May data (after revisions) and then ramped 287,000 last month as what many may call a catch-up ensued. Keep in mind though, the data also suggest the labor force dropped 820,000 during April and May and then rebounded 414,000 during June according to Dr. Ed.
A steadier view can be found for some in the ADP private-sector payroll data, which are based on actual paychecks processed. They tend to show a more solid pace of gains, coming in at an average of 181,000 jobs per month YTD. through June.
As we have said before here in last month’s job data review:
Keep in mind that while many fret over month-to-month changes, the JOLTS report continues to put job openings are at a record high. Some of the chop could very well be that it is getting more difficult for employers to find qualified employees. Remember that the next time we get all bothered by a “low” monthly report.
What Matters Most?
In the end, the important aspect we want to keep an eye on is the rate of wage and salary gains occurring as a result of payroll job and hourly wage growth. Dr. Ed sends along his Earned Income Proxy (EIP) each month which has historically been highly correlated with wages and salaries in the private sector and with retail sales excluding gasoline.
Based on the latest data, the EIP rose to yet another record high in June, tacking on another 0.3% MoM, and standing now at up 4.3% YoY. As much as this will go against the grain of all the naysaying, the data stands as a solid foundation for retail sales, overall consumer spending, and the broader economy.
I must say, having looked everywhere for the same set of circumstances as we have today, I am totally stumped. I cannot find a time in the past where we stood at near-record highs in the averages with this much fear deeply embedded in the crowd – almost across the board.
If I told you again that fund managers have record cash levels in their funds or that consumers are sitting on over $8.3 Trillion in cash, you would be convinced the markets must be down pretty big from their most recent highs.
If I told you that just a few months ago we hit the lowest level of bullish investors in the last 30 years (even lower than in both 2003 and 2009), you would be right to assume a bear market might have already been somewhat aged.
If I capped those facts off with these chart stats snapped in below, you would be darn near assured that markets were in a protracted corrective window:
Well, oddly, one would be vastly incorrect in that very logical assumption.
Let’s review the charts above: The first is Citi’s latest readings on their internal panic/euphoria model. It suggests substantial upside is the surprise.
The second chart shows the number of times “stock market crash” has been used in recent media articles at various times in the past. Last week was the third highest reading of all time.
The third chart I have posted before – it is Wall Street’s latest own sell-side crowd view and their feelings about the markets as it pertains to suggested exposure to equities.
Note last week’s readings were lower than 2003 and 2009’s bear market lows.
Further, one needs to gaze all the way back to the late 80’s and mid-90’s to find readings this low.
Lest we make the error of not seeing how valuable this data is, keep in mind where the averages were during those previous periods. The answer?
Roughly 14,000 to 16,000 DOW points lower than we are now!
Let’s not forget that just last week, I posted this chart showing the 8-week rolling average of bullish readings on the AAII survey. I posted it to give you a feel of the long averages and to take out the weekly gyrations. It gives you a sense of how long this fear of the equity market has lasted:
How far back back does one need to roll to find readings this low? The early 90’s…when the DOW was less than 20% of its current value.
I realize one can take any one of these data points and suggest it could be an outlier and could therefore, mean nothing.
It becomes much more difficult however, to take all of these data inputs together and comprehensively deny they provide potentially staggering implications.
Recall all the while, investors continue to literally flood bond funds and bond auctions in their demand for “safety” over equity risk in the future.
I wish I could provide you an example of when these circumstances had come together like this before.
Maybe instead of great setbacks to take advantage of, we instead continue to chop back and forth just under the breakout into new all-time highs. The broad-based nature of the rally on Friday – along with bonds barely budging – hints that we might be getting that break to new all-time higher earlier than anticipated. Still, the masses prefer bonds.
So much for a summer swoon?
The market may very well be sniffing out something we have noted often here. Our economy is wrapped so tightly these days – but all focused on one possible outcome – our potential demise.
We have focused for so long on making sure we wring out all the risks which could create another 2008-2009, that we have completely missed the more important risk:
Can we deliver on the demand that is headed our way?
Along with still feeling all the pain of the 2009 bottom in stocks, the experts have been blinded by the nature in which the energy sector earnings were being reported to the masses.
Yes, energy had a bear market. Yes, it drove impact into other related sectors – for a time. It created a fear of an “earnings recession” as total earnings have fallen just 2.7% from the all-time highs. Oddly though, margins have stayed very close to their 10.4% levels in mid-2014 when the battle in energy began.
And now? Forward earnings and revenues have stopped going down and have been rising for weeks. In another quarter or so, we will no longer care about 2016 data and be focused instead on 2017-2018 projections, all of which are now steadily rising.
In essence, one can readily argue that the nature of the world continues to throw everything it can at the US economy – and it keeps on ticking.
Last on this front, while there is still plenty to fret over, and always will be, the monster that we began the year with – energy – has fallen by the wayside. Why?
We can expect the rebound in oil prices since the start of the year means that the Energy sector’s revenues and earnings expectations, once creating the feared “earnings recession” are now boosting overall S&P 500 expected results rather than weighing them down.
Not too shabby – and right on time for the round-trip nature of these events as covered often in this steady pace we have suggested.
Look, there will always be another monster. But, we must recognize that the US economy finds itself in a very special position – one massively overlooked or outright misunderstood.
As noted above, we spent way too much focus on making sure we eliminated the pain of another 2008-09. That is a fallacy in thinking and may very well have planted the seeds for what our next problem might be:
Lots of “surprising” demand with a lengthy ramp-up to fill it.
The pendulum is setting up to swing the other way. It’s been a long time coming – but it is coming – and the data suggest the demand in our demographic barbell pipeline will set records on almost all fronts….and for far longer than currently anticipated.
Get ready for plenty more to fear – and lots of opportunity along the way.