Hard Economic Data Suggests A Continued Strengthening Of The Economy

Tuesday's release of the Chemical Activity Barometer (CAB) by the American Chemistry Council clearly is representative of an economy that is strengthening. The report for April showed a twelfth straight month over month increase in the CAB index. The significance of this is the fact the CAB Index leads the trough in the economy by an average of four months. The year over year increase equaled 21.7% and was the largest YOY increase since the 22.6% YOY increase in March 1951. The diffusion index for the CAB data was 100%. This means all the contributors to the index were positive.

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Stock Buyback Rate Continues To Increase

S&P Dow Jones Indices recently reported stock buyback results for the fourth quarter of 2020 noting a 28.2% increase in the quarter versus the third quarter increase of 14.8%. This increase in buyback activity for S&P 500 companies follows a steep contraction in Q2 2020, i.e., $88.7 billion versus $198.72 billion in Q1 2020. Aggregate dividends paid in Q4 2020 increased to $118.84 billion versus $115.54 billion in the third quarter last year. Buybacks totaled $130.5 billion versus Q3 buybacks of $101.8 billion. This level of buybacks pushes the quarterly back amount above the dividends paid in the quarter as seen with the red and purple lines in the below chart.

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Small Improvement In Small Business Optimism, But Large Positive Labor Market Signs

The March NFIB Small Business Optimism Index increased to 98.2 compared to the prior month reading of 95.8. The report notes seven of the 10 index components had improvements. However, the uncertainty component increased six points as business owners were more uncertain about whether this was a good time to expand and make capital expenditures.

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Positive Job Market Developments: Openings And Quit Rate Are Increasing

Earlier this week the February Job Openings and Labor Turnover Survey (JOLTS) was released showing job openings continued to increase. For the February period job openings equal nearly 7.4 million and is approaching the peak job openings level of 7.5 million reached in late 2018. This represents a positive sign that economic activity is increasing and businesses are experiencing increasing demand; hence, the need for more employees.

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Individual Investor Sentiment Is Elevated

The  American Association of Individual Investors reported a jump in bullish sentiment to 56.9%. This is the highest bullishness level since the reading reached 59.7% for the weekly reporting period ending January 4, 2018. As the below chart shows, higher levels of bullishness have a tendency to occur near market tops; however, the pullbacks can be brief or short lived. Also, bullish sentiment can get to higher levels as happened in 2003 when bullishness was reported in the low 70 percent level.

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So Far, A Better Year For The Dogs Of The Dow

In 2020 the Dogs of the Dow strategy significantly lagged the return of the broader S&P 500 Index. For the 2020 calendar year the Dow Dogs returned a minus 8% versus the S&P 500 Index return of 18.4%. Several factors led to the Dow Dog underperformance. First, the 2020 Dow Dogs held two energy stocks out of the total ten stock portfolio. Exxon Mobil (XOM) was down 36% and Chevron (CVX) was down 29% last year. In the technology space, the two Dogs were IBM and Cisco (CSCO), down 1.2% and down 3.5%, respectively. For 2021 though, the Dow Dogs have jumped out to a strong start up 12.0% versus the SPDR Dow Jones Industrial Average (DIA) up 8.9% and the SPDR S&P 500 Index (SPY) up 7.5% as seen in the below table.

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