Tuesday, June 12, 2018

Small Business Optimism: 2nd Highest Level In 45-Year History

Today, the National Federation of Independent Business (NFIB) reported the May Small Business Optimism Index increased to the second highest level in the survey's 45-year history. The May reading increased 2.6 points versus the April reading and exceeded the high end of the consensus range.



Econoday reports:
"the rise in optimism among small business owners was broad-based, with 8 of the 10 components of the index showing improvement. Contributing to the overall gain were plans to increase inventories, which rose 3 points to a net 4 percent, earnings trends, rising 4 points to net 3 percent and a survey record, plans to make capital outlays, up 1 point to a net 30 percent, and expected credit conditions, which rose 1 point but remained negative at a net minus 5 percent."
Four out of last seven highest NFIB readings have occurred in the last eighteen months. As the below chart shows, historically, 1-year subsequent returns for the S&P 500 Index have generally been strong following high levels of small business optimism. Going forward I will include tracking of the equity market's performance based on this new high reading as well.


Sunday, June 10, 2018

Another Look At Growth Versus Value

Writing blog commentary serves as a permanent record of one's thoughts at a specific point in time. When reflecting back on earlier posts, expectations and conclusions do not always unfold in the market or economy as anticipated and written about at that time. The benefit is one can adjust future thinking and conclusions if necessary. Sometimes events occur that one simply could not anticipate and the events result in a change of direction in the market. All investors would benefit in tracking how they arrived at their investment decisions..

It seems over the last few weeks there has been much written about the outperformance of growth stocks versus value stocks. The extended outperformance of growth over value has pushed the relative valuation to a high for the growth style and a low for the value style and was referenced with a chart in the June monthly presentation by State Street Global Advisors. The below chart is a slightly different version but shows the higher relative valuation of large cap growth versus large cap value at this point in time.


Wednesday, June 06, 2018

One Chart Will Not Predict The Next Recession

I had the fortune to read an article yesterday, Uh-oh: Unemployment Falls Below 4%, that noted,
"On each occasion that the unemployment rate sank beneath 4%… recession was soon on tap. To remind, it now rests at 3.8%. But why should recession rapidly follow peak employment?"
The article included the below chart and provided several reasons that would seem to justify the fact a recession is near when the unemployment rate is below 4%. Often times these scary or miracle charts are highlighted in an attempt to scare investors out of the market.


How 'near' to the start of the next recession was the unanswered question. The 1969-1970 recession was cited in the article which closed out the economic expansion that began in early 1961. During this expansion, the unemployment rate fell below 4% in February 1966 and the expansion ran another 3+ years before the onset of the 1969-1970 recession.

It is unlikely that one variable will provide an investor with the exact insight into the next economic recession. One variable I have highlighted recently is the yield curve. If the longer term Treasury yield (in this case the 10-year Treasury yield), falls below the shorter term Treasury yield (the 2 year Treasury yield,) we say the yield curve has inverted. Every recession since 1950 has been preceded by an inverted yield curve. Below is a chart of the yield curve (maroon line) along with the unemployment rate. 


Also included in the chart is the 12-month moving average of the unemployment rate. More importantly, from a recession prediction standpoint, when the unemployment rate crosses the 12-month moving average of the unemployment rate from below, this acts as a better potential recession predictor versus the unemployment rate itself. Evaluating the unemployment rate along with the yield curve also adds higher recession predictability too. The yield curve is certainly flattening, but it has yet to invert and we do not believe an inversion occurs near term. I discussed the strong equity market returns that tend to occur around yield curve flattening periods in an earlier article, Potential For A Stronger Second Half In Stocks.

If it were only as easy as one chart providing one the ability to predict a recession, a lot of economist might be out of a job. Certainly, the current expansion looks to be going into the record books in terms of length and there are a number of other factors that warrant heightened attention, but the unemployment chart alone is highly unlikely to provide an investor with the Holy Grail to recession predictability. The trend in the unemployment rate may actually continue lower in light of yesterday's JOLT Survey. For the second straight month, more jobs are available than those unemployed and actively looking for work.



Sunday, June 03, 2018

Record Levels Of Strength In Economic Sentiment Reports

As regular readers of this blog know, from time to time I opine on investor sentiment whether it is the AAII Sentiment Survey, the Investor Intelligence Advisors' Sentiment report or the NAAIM Exposure Index. At the moment, suffice to say that these 'investor' sentiment reports are neither overly bullish or overly bearish and conclusions drawn from them are most useful when the data are at extremes. Below is a chart of last week's bullish reading from the AAII Sentiment Survey and its current reading falls between + and - the one standard deviation levels.



Sunday, May 27, 2018

Only The Good News

As seems often the case, it is the bad news that leads headlines and garners the attention of those interested in digesting news reports. In the current economic environment though it seems somewhat difficult to promote the bad news when there seems little of it. I am not saying there is no bad news, but much of the news today that is related to the market and the economy is decidedly positive, however, from my perspective this good news does not seem to get much press. So, below are highlights of some of the positive news that may be of interest to investors.

The Consumer:

The consumer segment accounts for 70% of economic growth and post the financial crisis in 2009, the consumer seems in very good shape.
  • debt payments as a percentage of disposable personal income is lower than the pre-financial crisis level and below the level at the beginning of 1980.


Saturday, May 26, 2018

Potential For A Stronger Second Half In Stocks

Seems as though much has taken place in the first five months of this year that is newsworthy and impactful to the markets, i.e. Iran, North Korea, tariffs, an increasing 10-year yield, and I could go on. With the volume of news flow though, the equity market has essentially traded sideways this year with the S&P 500 Index price return equaling just 1.78%.



Sunday, May 20, 2018

Dollar Strength Leads To Large Cap Stock Outperformance

A recent strengthening of the US Dollar has some investment commentary now favoring small cap stocks over large cap stocks. This is partly due to the earnings headwind that can negatively impact multinational companies as they convert foreign earnings back into the Dollar. One recent report titled, Rising Treasury Yields And Dollar Completely Change Investment Themes, noted:
"The resumption of the bull market has taken shape in the form of small caps. I fully expect that the rest of the market will follow suit eventually, but rising treasury yields and the surging dollar have money rotating feverishly into smaller companies and that relative strength is likely to continue."
In the below chart, a downward trending red line indicates small cap stocks are outperforming large cap ones. In 2018 small cap stocks have outperformed large cap stocks while the US Dollar Index (DXY) has risen from below 90 to almost 94.


Thursday, May 03, 2018

Investor Sentiment Continues To Be Less Bullish

This week's Sentiment Survey report from the American Association of Individual Investors continues to show a falling trend in the level of bullishness of individual investors. This week's bullishness reading was reported at 28.4% and down from 36.9% in the prior week. The current bullishness reading is near the minus 1 standard deviation level and these sentiment measures are most useful as a contrarian indicator at extremes. In January of this year the bullishness reading reached near 70% and subsequent market returns have trended lower since then. AAII published an article, Is the AAII Sentiment Survey a Contrarian Indicator?, that provides insight into the market's return at various sentiment levels.



Heightened Volatility A Result Of The Change In The Earnings Growth Rate

Investors are experiencing a market exhibiting a higher level of volatility. This heightened volatility is more normal than the lack of volatility experienced in the few years leading up to 2018 and yet the S&P 500 Index is down less than 2% this year.



Wednesday, April 25, 2018

Consumer In Decent Shape, A Positive For Continued Economic Growth

In spite of the market's negative reaction to some of the recent earnings reports issued by credit card companies, one might think the individual consumer is in pretty bad shape. To the contrary though. About a year ago I evaluated the consumer as a result of issues surrounding some of the credit card firms. As was the case in the earlier blog post, the consumer data today is indicative of a consumer that is not overly burdened with debt repayment.

The following three charts provide a visual picture of the debt service burden on consumers along with various charge-off and loan delinquency rates. The first chart represents the Household Debt Service Ratio which is debt payments as a percentage of disposable income. The current ratio of 10.3% is just slightly above the year ago level of 10% and remains below levels seen at the beginning of prior recessions.



Sunday, April 15, 2018

Dividend And Stock Buyback Growth Potentially Accelerate In 2018

Near the end of last month S&P Dow Jones Indices reported preliminary dividend and buyback activity for the S&P 500 Index for the fourth quarter of last year. For the quarter the dollar amount of dividends paid increased 5.4% versus the same quarter in the prior year. Additionally, for the quarter, dividends combined with buybacks increased 3.1% year over year. It is not uncommon for the combined dividends with buybacks to exceed as reported earnings in the quarter and that was the case for Q4 2017 as seen in the below chart.