Higher Unemployment Level As Some States Are Slower To Reopen

Improvement is being made in the job market as the continuing claims data and unemployment rate continue to decline. In addition to the continuing claims category and as a result of the pandemic, another category of unemployment insurance has been created, the Pandemic Unemployment Assistance (PUA) category. The PUA program had 11.5 million individuals receiving benefits as of the week ending September 5. This category is almost as large as the regular unemployment category which totaled 12.3 million individuals for the same ending week. As can be seen in the below chart, continuing claims, including PUA has improved; however, unemployment assistance across these categories remains at too high of a level.

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Individual Investor Sentiment Not Matching Actions

The American Association of Individual Investor's Sentiment Survey release for the week ending 9/23/2020 showed bullish investor sentiment fell 7.1 percentage points to 24.9%. The decline in bullish sentiment largely showed up in the 5.6 percentage point increase in bearish sentiment. When all is said and done, the bull/bear spread widened to minus 21.1 percentage points from the previous week's spread of minus 8.4 percentage points. As the below chart shows, since January bullish sentiment has been on the decline and does remain at a level lower level.

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Here We Go Again: Value To Finally Outperform Growth?

So far for most of the month of September, the large cap value stock space has outperformed large cap growth. Since the end of the financial crisis of 2008/2009 I have probably written about the market's turn to favoring value at least a dozen times. If performance is the yardstick, the growth style has ultimately been favored by investors for the last ten or eleven years as seen in the below chart.

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Mega Cap Stocks Run Into A Headwind

The first two days of September saw the S&P 500 Index get off to a nice positive start, up 2.29% on a price only basis. Since then though the market has declined 5.4% on a total return basis. This decline has been led by the large cap technology stocks in the index. The blue line in the below chart represents the average return of six large cap technology companies in the index, Facebook (FB), Amazon (AMZN), Apple (AAPL) Netflix (NFLX), Alphabet f/k/a Google (GOOGL) and Microsoft (MSFT).

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Small Business Optimism, And Importantly Hiring Plans, Remains Favorable

The NFIB Small Business Optimism Index for August was reported at 100.2, which is a 1.4 increase over July's reading. The NFIB report notes seven of the 10 index components increased while two declined. The Index remains at a high level, a level which was reached following the recession after the technology bubble. The NFIB report also notes the August reading is slightly above the 47-year average for this index.

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The Stock Market And Economy Seem To Be In Sync

There are times when I write a blog article and I remind readers the stock market and the economy are not the same. By that, I mean the stock market sometimes moves counter to what one might expect based on economic data releases. Often times this divergence occurs as the stock market is forward looking and its movement anticipates better or worsening economic conditions while much of the economic data is reporting on the past. Today however, it seems the market and economy are in sync to a certain degree. Since the S&P 500 Index low on March 23 it has returned over 53% on a price only basis as of the this past Friday. Over the last 24 weeks, the S&P 500 Index has generated a positive return in 16 of them with 8 weeks being down. Following is a review of some economic highlights which suggest many areas of the economy are improving in a 'V-shaped' manner.

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Stock Prices Reflecting A Resumption In Earnings Growth

One factor about the equity market is its movements are often influenced by expectations. Economic news that is reported better than those expectations can impact broad equity market prices and earnings that beat expectations are an important variable impacting the price of stocks too. For the broader marker, in this case the S&P 500 Index, earnings expectations for 2021 appear to have bottomed as the hook at the end of the red line on the below chart shows. Also important is earnings growth is expected to resume with an increase of 26% in 2021 versus 2020 and a further 16% increase for 2022 versus 2021.

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So Far Not A Year For The Dogs Of The Dow

This year has not been a good one for the Dogs of the Dow strategy. A number of reasons can be cited, like energy sector weakness and both Chevron (CVX) and Exxon Mobil (XOM) included in the strategy this year or Cisco System (CSCO) and IBM a part of the Dow Dog portfolio and not Apple (AAPL). In a year where the FAANG + Microsoft (MSFT) portfolio is so dominant from a return perspective, it is clear from hindsight why the Dow Dogs are lagging.

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A Healing Job Market

With over 15 million individuals unemployed based on Thursday's jobs report and an additional 10.7 million individuals receiving Pandemic Unemployment Assistance, labor market improvement can not happen fast enough. However, employment related reports this past week indicate the job market is improving. Initial jobless claims for the week ending August 7 were reported at 963,000, a far cry lower than the nearly 7 million claims filed at the peak of the pandemic shutdown in March/April. Although last week's claims level is too high, they are declining.

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Economic Tailwind Contributing To Favorable Equity Market

In a number of my recent blog posts I have written about the "V-shaped" recovery unfolding in both the equity market and the economy. Economic data reported over the last two weeks continues to support this V-shaped narrative. Much of the recent economic releases are positive and the data, when plotted on a chart, trace out a V-shaped pattern as well.

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