The recession that started in March is the sharpest downturn since the Great Depression. As it turns out, it was also the shortest.
Friday's employment report should leave little doubt that the US economy has already hit bottom and is starting to recover. Every economist brave enough to make a public forecast thought nonfarm payrolls would drop in May and the unemployment rate would continue to rise. Instead, it was the opposite: nonfarm payrolls rose 2.5 million, and the unemployment rate dropped to 13.3%.
This doesn't mean the US is fully recovered, or even close; a full recovery is going to take at least a few years. But look for more positive numbers from here on out, including next week's reports on retail sales, industrial production, and home building.
Paul Krugman tweeted the possibility of the Trump Administration cooking the books, but that's absurd. Jason Furman, one of President Obama's top economists, pointed out that the Bureau of Labor Statistics has 2,400 career staffers and only one political appointee, with no ability to cook the books. The odds of a conspiracy among these career civil servants to help the Trump Administration are zero.
Some analysts have been saying that the unique nature of the economic downturn has made the unemployment rate unreliable, because, for example, PPP loans have allowed furloughed workers to be paid, even though they aren't working, so technically, some say, they are unemployed. Counting these workers as unemployed would have put the jobless rate at 16.3% in May versus the official report of 13.3%.
However, using the same method in April would have meant that jobless rate would have been reported as 19.5%, not the official estimate of 14.7%, which means the drop in the jobless rate in May would have been 3.2 percentage points (19.5% to 16.3%), not the 1.4 points reported Friday. And it's the change in the unemployment rate that matters for financial markets.
Meanwhile, initial jobless claims fell for the ninth consecutive week, and continuing claims remain below the peak hit in the week ending May 9, both consistent with an economy that is already hit bottom.
Another piece of evidence supporting the case for a recovery is that tax receipts look better. Every day the Treasury Department releases figures on various categories of tax receipts. These receipts vary wildly depending on the day of the week and the time of the month, so we like to compare them to 2015, because that was the last year the number of days in March through December fell on the same days of the week as 2020.
In the past five workdays, the Treasury collected $56.8 billion individual income and payroll taxes withheld from paychecks, up 11.8% from the same days in 2015. A month ago, in early May (specifically, the five workdays through May 7), these receipts were up 7.1% versus 2015. This acceleration signals the economy has turned a corner.
Which brings us to our outlook for equities. A month ago, with the S&P 500 at 2930, we projected that stocks would recover to 3100 by year end. But now we're barely under 3200. We continue to expect more gains, but don't expect it to be a straight line, with the S&P 500 finishing the year around 3350 and the Dow Jones Industrials average at 28,500.
Profits will be down substantially in the second quarter, but should recover strongly in the several quarters thereafter. Meanwhile, the money supply is growing rapidly, and the Federal Reserve is prepared to keep monetary policy loose for the foreseeable future, as should be clear after Wednesday's meeting.
The US has gone through tremendous turmoil so far this year, with a response to COVID-19 that included unprecedentedly widespread government-mandated economic shutdowns, followed by a combination of legitimate protests, riots, and looting. No one knows for sure what the second half will bring, much less 2021 and beyond. But we think that, like in the past, those who have faith in the future will be rewarded.
It is time to pay attention to the numbers, especially post-protest.
I just spoke with an executive at a VERY large employer in a state that had limited Covid issues. All the sudden cases are spiking to the point where it is causing issues running the business. Broad-based across the state in the major metro areas as they cover all geographies. They had almost no issues prior to now. But all of the sudden they are.
* The prices of some speculative stocks are so high, to quote Crazy Eddie... they are insane! To get a clearer view of the amount of speculation going on and the new market zeitgeist I recommend Tim "Not Judy or Phil" Collins latest column, here.
With the exception of a (QQQ) short and an elimination of my (GE) holdings - I have done little this morning. * Breadth is still a strong 3.5:1. * Ss (S&P) over Ns (Nasdaq), again, and despite strong gains in Tesla (TSLA) and Amazon (AMZN) . * Bonds are quiet. (I covered my bond short late last week.) * Oil is -$1.35/barrel. * Gold +$12.70. * Financials are "the world's fair." * Packaged food stocks are rebounding (with (SJM) and (THS) both +$+, I have been adding in recent sessions). (KHC) continues to rise after breaking through some technical resistance. * Speculation continues to run amok - even the energy space is ++ in the face of lower commodity prices. Low priced crap is flying - even the bankrupt kind. Finally, here are some of my big investing mistakes in the last few weeks - selling out (BA) , (PENN) , (VIAC) , (H) , (HLT) , (VNO) , (CMCSA) , and (MS) .
Position: Long SJM (large), THS (large), KHC (large), Short SPY, QQQ
Daily Affirmations With Dougie Kass: On Valuations
"I am going to write a good Diary on Real Money Pro today... and I am going to help people. Because I am good enough, I am smart enough and doggone it, people like me."
* For a small loss When I initiated a long in General Electric (GE) last year I mentioned that the stock was speculative (as it was difficult for me to get my hands around the company analytically - both financially and operationally). Given the above, the shares were never placed on my Best Ideas List.
In the interim interval, the spread of Covid-19 and its adverse industrial impact (especially on airlines and travel) was severe. The stock has risen by almost +60% since the 2020 low. I have elected to sell the position this morning (trading at $8.30) - given the continued lack of fundamental clarity, the worrisome economic backdrop, and the magnitude of the share price recovery from the lows. GE was a mistake.
Blind squirrel stumbles on yet one more acorn. Friday's pre-opening projection of a possible upside market breakout became almost self-evident even before the bell rang.
The punch through the 50 day moving averages Dow 26711 and S&P 3155 prompted very sharp instant upside gaps. They just missed escape velocity and they have to try again this week.
Break-throughs remain potentially nearby. Unemployment numbers may have had more than a few technical glitches - being rechecked.
Watch Dow 27350 to 27400 and S&P 3220 to 3245.
Fed may move to center stage. The impact of their actions on the economy grow to appear to be more disproportionate.
* Regardless of one's politics, the polls and betting parlors have indicated a dramatic shift in the November election outcome * A Democratic win could be market unfriendly
Over the last 4-6 weeks the November Presidential polling data has shifted from favoring the Republican incumbent to favoring the Democratic candidate.
As we have observed over the last four years, nearly anything can happen in politics - and the pendulum of popularity can change swiftly, unexpectedly and abruptly (as highlighted in my 15 Surprises for 2020).
However, if the recent trend change continues and Vice President Joe Biden is indeed elected President - there are some reasons to be concerned about the markets.
As observed previously, America is moving to the political right and to the political left. And that has created a toxic worldwide political setting and near-permanent shift and bear market in political decency. The death of traditional conservatism (Republicans) and the move toward socialism (Democrats) has created a schism of beliefs that expand political animus and argue in favor of reduced compromise and less likely implementation of much-needed legislation (infrastructure comes to mind). Worrisome to many, including myself, are the social and economic ramifications of the paradigm shift of a widening gap in political beliefs, seen every day over the last few weeks on the streets of America.
Importantly, a Biden administration will likely bring forth higher corporate and individual tax rates - taking back the benefits delivered by the Trump administration over the last three and a half years. A wealth tax is not out of the question.
Complicating the matter is unbridled fiscal spending and rising Federal debt loads - before Covid-19 and most decidedly the rise in spending from defending consumers and corporations from the economic impact of the virus. Deficits are supposed to decline as an economic recovery matures - just the opposite of what happened over the last two years. While there is a growing feeling that, like excessive monetary easing, there is no tipping point nor negative investment ramifications to unlimited fiscal non-restraint - that is just plain stupid.
I remain skeptical of the ability to continue the current pace of fiscal spending and monetary growth without higher taxes (and lower services) and without raising inflation and inflationary expectations which has the potential of raising the bond vigilantes from the dead - note the rise in intermediate to longer rate yields on debt instruments in the last two week.
Debt is a governor to growth - and the magnitude of the public sector's explosion in debt is unprecedented.
Given the fragile domestic economy, continued health uncertainties over the balance of the year, the elevated level of unemployment and the widening income and wealth gap - a Democratic win in November coupled with rising tax rates in 2021 are not the recipe for a marked acceleration in the recovery of the U.S. economy nor for a continued recovery in equity prices.
Bottom Line
The S&P Index has been buoyed by the curve flattening and signs of possible therapeutic/vaccination inroads - which formed the basis for my expectation of a "rip your face off rally and mother of all short squeezes."
Machines, algorithms and traders who worship at the altar of price momentum have likely exacerbated the market's uptrend - taking the S&P Index to well above "fair market value" and leading to an unattractive reward vs. risk proposition.
Among the many factors, the shifting sands of politics has the potential for abruptly changing the northerly course of stock prices witnessed since mid-March.
I think the biggest question the Fed faces in their meeting this week is to what extent do they continue to have their foot on the money printing pedal. The US economy doesn't need the Fed in its recovery. All it needs simply is containment of the virus and businesses to reopen. The Fed's balance sheet though has almost doubled since last August to a new high of $7.17 Trillion as they've become the lender of all resort. With respect to QE and its asset purchases of Treasuries, they are still buying about $20b per week, about the same pace as QE infinity in 2013. When is enough? I really want to dislike longer term Treasuries as the Fed should continue to slow its purchases and inflation creeps further into the economy but who knows to what extent they will want to suppress a steepening of the yield curve.
To this, they will also talk about yield curve control and I've made my point clear. That would only help debtors and would do NOTHING to stimulate economic growth as telling the world rates will stay long for a while, aka forward guidance, only encourages businesses and households to wait. Forward guidance as policy has proven to be a failed economic stimulant.
FED's balance sheet
Speaking of yield curve control in Japan, have you seen yields there recently? The 40 yr JGB, the area of the curve that is least influenced by YCC out 10 yrs closed at the highest level since April 2019 and it helped to rally Japanese bank stocks. The 10 yr yield is near the highest since 2018.
40 yr JGB yield
10 yr JGB yield
China reported its May trade figures and it was a mixed bag relative to expectations but negative nonetheless. Exports fell 3.3% y/o/y, about half the estimate of a decline of 6.5%. Helping exports was a pick up in the sale of medical supplies such as masks offset by still soft overseas demand. Imports though dropped by 16.7%, well more than the forecast of down 7.9%. That was partly weighed down by the drop in the price of oil which we know China is a large importer of. Bottom line, the May data reflects a global economy that is just about reopening so the data in the coming months will be more relevant in terms of gauging what's really going on. The Chinese stock response was mixed as the Shanghai comp was up by .2% but the H share index was weaker by .6%. The offshore yuan is little changed.
Taiwan, the tech export powerhouse, saw its May exports fall 2% y/o/y, not as weak as the estimate of down 4.2%. As China has reopened, that helped exports rise by 10.6% to them. Exports also picked up to the US by 9.3% y/o/y. Imports though fell 3.5% vs the forecast of a rise of 2.1%. That import number was weighed down by the price of oil, which of course is a positive for this country that doesn't produce much of its own oil. The TAIEX rallied 1.1% with most of Asia green as well.
By now it should be abundantly clear that - over the last three months - that the bank stock group is my favorite market sector.
I have rarely been as over weighted in one sector as I am in the financials now.
Though Friday's outsized market gap in bank stocks may herald a very short term share price top, the outlook is improving over the intermediate term:
* Earnings growth fears are moderating in the face of a faster than expected exit of a Covid-19 influenced downturn and because of a rapid (and abrupt) rise in energy prices. * Record 1Q2020 loan loss provisioning may have been overdone, leading to less threatening 2020 earnings and, even, loan loss reserve releases next year - which would be an upside and surprising shock to bank stock investors.
A faster than expected profit recovery is expected for the banking industry and an upwards valuation reset may be coming sooner than expected.
This is the recent message of the recent strength in bank stocks.
Position: Long C (large), BAC (large), WFC (large), JPM (large)
Danielle DiMartino Booth on the permanence of job layoffs:
White collar layoffs will dictate the path of the current recession; flagging permanent job loss risk, Bloomberg's Weekly Consumer Comfort Index indicates the only cohort for which sentiment continues to decline are those who earn between $75,000-$99,000
Current data are noisy, as evidenced in the BLS's "misclassification error" in Friday's payroll report; consumers are increasingly circumspect as Cox Automotive reported that more auto buyers are increasingly delaying purchases coincident with expiring rent moratoria
Permanent job losses are in recessionary territory and at the highest level since November 2009; while risky asset markets are being driven by liquidity and technicals, the job market fundamentals will become ever more apparent as stimulus measures are phased out
In 1841, landscape design pioneer Andrew Jackson Downing denounced them as "an abomination among the fresh fields, of which no person of taste could be found guilty." In Old Europe, the French used piquet, or pointed boards, as military gear to shield archers from cavalry. Mass production transformed them into a slice of Americana. Granted, the white picket fence was challenged in the late 1800s with the advent of the "suburb," which introduced borderless front yards. But the burbs proved no match for the 1876 centennial. As per the Smithsonian's annals, "The modest totem of middle-class prosperity stood even through the 1930s, when many American households couldn't afford to whitewash a fence, never mind an entire house."
America's fences have grown taller in many ways. But say the three words -- "white picket fence." It still puts a smile on your face and gives you a whimsical feel for a different era. As for what defines the middle, income before taxes for the third quintile is $55,870; the next notch up on the quintile ladder is $92,224.
If there is to be a second wave of redundancies, which will determine the gravity of the current recession, the stress will be felt in that second-to-highest quintile. As we wrote a few weeks back, the closest proxy we have to track these folks is Bloomberg's weekly Consumer Comfort Index drilled down to those who make between $75,000-$99,000 (yellow line). As was the case two weeks ago, this is the only income group wherein sentiment continues to decline to cycle lows. In May, it hit 36.7, which is still shy of its record January 2009 low of 25.7. But that's kind of the point. This group of higher-than-average-income workers overlaps with those who've been able to work from home. In a COVID-19 world, the job security afforded to those who don't have to interface with others should command a premium. Ergo, unless they're losing their jobs due to demand destruction, they should not be increasingly pessimistic. More importantly, if they are losing their jobs, there's nothing temporary about it.
That brings us to Friday's shocker of a jobs report -- the one that every single forecast missed by millions of jobs, which is in a word suspicious. QI amiga Philippa Dunne dissects payroll tables better than anyone in the business. And she's delightfully precise. Her take: "In the week ending May 16, which corresponded to the survey week, there were 18.6 million people receiving unemployment insurance in regular state programs, and another 10.7 million in the Pandemic Unemployment Assistance program, for a combined total of 29.6 million. There were another 300,000 or so drawing benefits under other programs (federal, newly discharged veterans, and others), for a total of 30.0 million (or 29,965,415 if you're a stickler for detail). In May, there were 21.0 million officially unemployed. Question: What's with the other 9 million?"
It's safe to say we'd all like to know where these folks are. The good news, if you can call it that, is that the Bureau of Labor Statistics (BLS) goofed. In a special note released, the BLS said that had the "misclassification error" not occurred, the "overall unemployment would have been about 3 percentage points higher than reported," as in 16.3% vs. the 13.3% reported. Back of the envelope using the 164.6 million U.S. workforce -- we found nearly five of the nine missing millions.
Perhaps we should just agree that the next few months are going to be NOISY. Some PPP loan recipients will renegotiate longer terms to keep workers; some will hit their forgiveness obligation today and begin laying off workers. The extra $600/week in unemployment insurance expires at the end of July. As recipients well know, this will generate its own distress.
Look no further than today's inset from Cox Automotive showing the ranks of would-be car buyers' delaying purchase has hit a post-COVID-19 high. One of the reasons offered - end of eviction moratoria. It's no coincidence that after three weeks of improvement, the other group surveyed by Bloomberg to see sentiment deteriorate was renters.
In the spirit of noise mitigation, let's go back to being strict with the data. When you're dealing with data sets on significantly different scales, it helps to employ log scales to normalize trends. A timely case in point -- temporary layoffs (blue line) and permanent job losers (red line). In absolute terms, temporary layoffs have spiked to such a degree relative to permanent ones that a simple comparison would overstate the rise in the former and understate the increase in the latter. Logs level the playing field.
As you can see, permanent job losses are at the highest level since November 2009. They are well into recessionary territory. Perhaps it's best to focus on this one metric for the moment. By the way, the correlation of permanent job losers to those making $75,000-$99,000 is -0.79 since 2004; it's -0.18 for temporary layoffs. Until the noise dies down, the workers in this "white picket fence" cohort are telling us in no uncertain terms everything we need to know about the U.S. job market.
