And Then There Were Four

Hard to believe that back in the 1990's there were over 35 large banks or banking related companies in the U.S. and now we are down to just four.  The chart below shows the progression over the last few decades.

(Click on image for larger version)

Jobs Increase Significantly

Total nonfarm payroll employment increased by 288,000 in April, best number in over a year.  Employment growth was widespread, led by gains in professional and business services, retail trade, food services and drinking places, and construction.
Professional and business services added 75,000 jobs in April. Employment in this industry had increased by an average of 55,000 per month over the prior 12 months. In April, employment growth continued in temporary help services (+24,000), in management of companies and enterprises (+12,000), and in computer systems design and related services (+9,000).

It was a solid beat overall surpassing estimates calling for roughly 200,000 new jobs.  We should be happy to see that more Americans are finding work.  However, quantity isn't enough.  For things to really improve there needs to be quality behind the payroll growth.  Average hourly earnings went nowhere.  Combine this with no increase in the average hourly workweek and the drop in the participation rate, it's cause for a bit of concern. 

Interestingly, long-duration bonds aren't so sure about the strength of the number and after selling off immediately following the release, rose to a new high for the year.  We are at one of those unusual junctures in the markets.  Bonds have rallied this year, commodities are up, and many stocks and sectors are undergoing serious corrections, while at the same time the broad large-cap indices, like the Dow Jones Industrial Average, have held on strong.  Past research shows that when Treasury bonds do well, we tend to have higher volatility in stocks right after strength has occurred. Of course this isn't always a guarantee, but the probability of continued volatility remains high. 

First Quarter Comes To A Close

As this first quarter draws to a close the equity market continues to dance around the 1850 level (as measured by the S&P 500 Index) and it’s beginning to look as if it may be some time before stocks start moving up again.  This would not be the first time that this market has become stalled around a price level.  Back in 2011, the S&P 500 Index was trading around the 1250 level for the entire year and ended the year flat versus the closing price on December 31, 2010.   We don’t expect another year of a market trapped in a range and ending the year unchanged, but we wouldn’t be surprised if the markets went through the first half of this year without much progress being made. 

Fortunately, we haven’t suffered any deep declines in the broad indices, although on a sector by sector basis the returns have been very wide for what has been a flat quarter.  One sector which has been particularly disappointing has been retail, which started the year as one of the most widely favored groups in the whole index. Thus far the Retail Index has fallen over 5.5% in the quarter, while the Utilities Index is the best performing so far in 2014 ,up 6.8%, after it was expected to be one of the worst performers in 2014.

However, its defensive nature and small size make it a very unlikely candidate for market leadership.  Its interest rate sensitivity counts against it as any move in interest rates can quickly change this positive return into a negative one.  But this is not true of the second best performing group which is the bank index, which has also returned 6.8% in the quarter. This group would actually benefit from rising short term interest rates, since these would help expand lending margins.

Healthcare and technology sectors also performed well during the quarter, up until the last few weeks when the sectors have given back most of their first quarter gains, as investors rotate sectors.  

The start of the second quarter will bring about the beginning of earnings season.  The actual earnings results from companies during the first quarter should tell us a great deal about where markets and certain sectors could be headed as we head into summer.  Buckle up, we could be in for a bumpy ride.

Employment Near Pre-Recession Levels

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. ...
The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000. With these revisions, employment gains in December and January were 25,000 higher than previously reported.
Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99

Total nonfarm payroll employment increased by 175,000 in February, and the unemployment rate was little changed at 6.7 percent, the U.S. Bureau of Labor Statistics reported today. The change in total nonfarm payroll employment for December was revised from +75,000 to +84,000, and the change for January was revised from +113,000 to +129,000.  With these revisions, employment gains in December and January were 25,000 higher than previously reported.

The headline number was above expectations of 150,000 payroll jobs added.

The graph below shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.  As you can see we are very close to getting back all the jobs lost since the recession officially began.  We need 667,000 new jobs created before getting back to the zero line.

 

This chart illustrates the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

The next chart shows the employment population ration and the participation rate, both of which are finally starting to tick upward at the same time.  Very good news on the jobs front.

The headline number was above expectations of 150,000 payroll jobs added.

The first graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.


Employment is 0.5% below the pre-recession peak (666 thousand fewer total jobs).

NOTE: The second graph is the change in payroll jobs ex-Census - meaning the impact of the decennial Census temporary hires and layoffs is removed to show the underlying payroll changes.

The third graph shows the unemployment rate.

The unemployment rate increased in February to 6.7% from 6.6% in January.

Read more at http://www.calculatedriskblog.com/#W3shBA8DHRFl1ohE.99

Change In Character

 

The market could be experiencing a change in character that marked the good news is good news and bad news is good news market for the past several months.  The potential for a catalyst to rattle the markets was there and looks like the emerging market complex is set to deliver such a catalyst to the US equity markets.  It of course remains to be seen whether this is just a temporary blip in an ongoing march higher by the markets or whether it develops into something that proves more troubling, similar to what happened in 1998.  Unfortunately we don't have any certainty on this matter, but we suspect to will fall somewhere in between the best case and absolute worst case scenario.

 

The Fed continues its plan to  taper asset purchases by another $10 billion per month.  The committee expects to continue the taper process for the balance of the year bringing asset purchases to zero by the end of 2014. We suspect this liquidity drain out of the system will impact the economy as well as the stock market in the coming months.  2014 is setting up to be an interesting year.

 

 

 

 

 

 

2014 Predictions

As we begin a new year, it’s time for the various market predictions.  Analysts and markets strategists have made a number of projections for the S&P 500 for 2014.  Below is a summary of these projections and of recent historical trends in the data.

• Where will the market close in 2014? For 2014, industry analysts in aggregate see the index closing higher in 2014, while market strategists on average see the index closing lower by year-end.
• What is the projected EPS estimate for 2014? As of December 31, industry analysts in aggregate were projecting record-level EPS in 2014 of $119.80. However, they have overestimated the final EPS for the index on average over the past 15 years.
• Industry analysts ($119.80) and market strategists ($118.15) had similar EPS estimates for 2014 on December 31. This marks the smallest absolute spread between the EPS estimates in five years.
• Is the index overvalued? Based in the closing price and forward 12-month EPS estimate on December 31, the forward 12-month P/E for the index is 15.4. This P/E ratio is well above the 5-year and 10-year averages, but still below the 15-year average.
• In terms of earnings for the index, industry analysts project growth of 10.5% for 2014. All ten sectors are predicted to see earnings growth, led by the Consumer Discretionary, Materials and Telecom Services sectors.
• In terms of revenues for the index, industry analysts project growth of 4.0% for 2014. All ten sectors are predicted to see revenue growth, led by the Health Care, Consumer Discretionary, and Information Technology sectors.