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A bad number

Brouwer & JanachowskiJune 3, 2016

If you’ve followed my forecasts, you’ve probably lost a lot of money”. So said a remarkably candid St Louis Fed President James Bullard a few years ago. Now, it’s not the Fed’s job to forecast markets. But it is to forecast growth. They have consistently over estimated growth, employment and investment and underestimated inflation for years. We continue to believe that the economy is on a more or less permanent slow growth trajectory. Two percent is great if we can get it. Hence, we like U.S. Treasuries. Low growth means low rates. This is what caught our eye this week:

  1. Stocks within a whisper of all time high: the S&P 500 reached 1% short of last May’s record high. The market is now up just over 2% year to date and up 15% from February’s lows. Why? If the economy struggles so?
  • There was a very real and deep earnings recession, starting in energy and over flowing to financials. This is now mostly done.
  • Some fears didn't materials. China was not as bad. Oil started to recover
  • The dollar weakened. This is very important. Around 3% of S&P 500 company sales are overseas.

And on one very important measure: the S&P 500 Total Return (which measures dividends reinvested) hit a clear all time high compared to the S&P 500 Price Return (the headline number that doesn't measure dividends). This is what it looks like:Blog June 3 2016 -1 SPX TRPerformanceGraphExport (2).xls copy

  1. Jobs: this was a bad number. New jobs came in at 35,000, its lowest since October 2010. Unemployment fell to 4.7% but that was mostly because labor force participation shrunk. If not for that, the rate was unchanged. Some strike action altered the numbers a bit. But there was no escaping just how bad these were. This postpones any talk of a rate increase at least until the fall. Bonds rallied sharply.
  1. Productivity: last week’s numbers were not strong but received little headline because they have been that way for some time. This is receiving more attention, for example, here and here. Here is what U.S. productivity growth looks like:Blog june 3 2016 - 2BLS Bureau of Labor Statistics Data copy 3

It’s flat and well below trend. We’ll explore this more but (over) simply: if the U.S. cannot produce more per worker, then growth comes from using more labor. You can grow your own labor force (demographics) or import it (immigration). Neither is happening. So if you need more workers, corporate margins come under pressure. In Europe, however, there is ample room for labor growth given high unemployment. It’s one reason why we like Europe despite this week’s news from the ECB.

Bottom Line: This week’s news means Treasuries for longer. Stocks will take heart that rates will stay lower.



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--Christian Thwaites, Brouwer & Janachowski, LLC


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