My Friday column is divided into two sections. The first uses the long-leading, leading, and coincidental format developed by Arthur Burns and Geoffrey Moore to determine the current economic trajectory. The second looks at the markets.
Financially, the economy is in good shape:
The Fed has been pumping cash into the economy (left). The Fed’s credit market support programs have lowered financial stress; the BBB yield (right) has dropped to 5-year lows.
The earnings picture is improving — but remember that word is clearly relative (emphasis added):
The expectation is for total S&P 500 earnings to decline -22.8% from the same period last year on -2.9% lower revenues. This would follow the -32.3% decline in Q2 when economic and business activities came to a halt as a result of the pandemic-driven lockdowns.
The earnings outlook has been steadily improving since the start of Q3, as economic and business activities have resumed. While the latest labor market and factory sector readings suggest some deceleration in the recovery, the recovery is nevertheless in place which should sustain the improving earnings trend.
This means there is a growing possibility of upside earnings surprises along with analysts combing through earnings calls looking for positive commentary.
Let’s take a survey of the positive data:
New orders for consumer durable goods (left) and non-defense capital goods excluding aircraft (right) have completely rebounded.1-unit building permits (left) are at their highest level in five years . Average weekly hours of non-supervisory manufacturing employees rebounded but last month trended sideways. Still, the overall trend is positive. Financial markets have healed. The treasury market spread (left) is positive while the stock market (right) has rebounded.
The one very negative statistic is the 4-week initial average of unemployment claims:
The 4-week moving average of initial unemployment claims is still very high by any measure. However, over the last few weeks, I posted a tweet from economist Tim Duy that argued state-level problems are causing this statistic to lose its predictive importance. I haven’t seen anything more on this topic but it is certainly something to keep in mind.
The above graph converts data into base 100 using the end of the last recession (June 2009) as 100. Retail sales (in green) have returned to previous levels. Income less transfer receipts (in blue) has regained about half of its losses. Industrial production (in red) is slightly less than 50%.
The labor market is the one sticking point. The labor force participation rate and the employment/population ratio are about half their respective pre-lockdown levels. Jobs growth appears to be weakening:
Total establishment jobs have now regained about half their losses (left). But job growth is slowing (right).
Conclusion: the data is moving in an expansionary direction. The Fed has calmed the credit markets while also providing ample liquidity for expansion. There is a possibility for positive surprises during the upcoming earnings season. The leading indicators have turned the corner as has most coincidental data.
Let’s turn to this week’s performance tables:This was one of the best weeks in several months. The best news is that micro and small-caps led the market higher, indicating a higher risk appetite. And the gains for those sectors were impressive for a single week. Larger-caps also made good advances. While the long-end of the treasury market sold off, ideally we’d like to see a larger sell-off on a strong rally.All sectors were higher; the only issue was degree. Basic materials led the way higher, as it has for much of the post-lockdown rally. Energy — which has been a perennial laggard for some time, rebounded strongly. Two defensive sectors — utilities and health care — are in the top five.
I’m going to do most of the heavy analytical lifting in my weekend ETF review column. However, the markets are clearly moving in the right direction.
IWM 3 Month
Small-caps have broken through resistance and are at a 3-month high.
QQQ has bounced off its shorter moving averages and is trending higher, as is …
Overall, this is a good place to leave off for the weekend.
So — have a good weekend, keep an eye out for the longer weekend review and I’ll see you on Monday.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.