The Days Ahead: Payrolls and CPI
One-Minute Summary Market volume was down. It was a short week and we’re writing this on Wednesday. We have the jobs numbers on Friday but we expect a return to the 150,000 level from May’s 75,000. Not enough to tip the Fed’s hand into a July cut.
It was a case of another day, another record. The S&P 500 has now returned 19% this year. So did the Dow. We won't repeat our “don’t follow the Dow” lesson but it’s also up 14% this year. Since January 2018, however, it’s flat, which just goes to show much disruption the market has had to deal with in the last 18 months. The 10-Year Treasury continues to drop. It’s now at 1.95%, which is the lowest it’s been since November 2016.
We see no conflict between a strong bond and equity market. There are plenty of comments around that a low Treasury yield means a rate cut, which means a slowdown, which can't be good for equities. But that is to misread the equity market. Yes, growth is slowing and the Fed may well cut this year but stocks adjusted for slower growth a year ago. Stocks are at record highs but not record valuations. And in the last 18 months have only risen 8%. Small caps and international are still way off their record highs.
That’s hardly the stuff of exuberance.
1. Has this been the longest expansion? Like ever? Yes, but. But it’s also been the lowest rate of growth of any expansion in the last 70 years. Here’s the quick graph:
Since the 2009 crisis, we've seen average growth of 2.3%. In prior years it was much higher, even after the 2001 tech bubble. And we've had three negative, although not consecutive, quarters of growth. As we've said for a while: very bad recession and not-so-great recovery. This is how this recovery compares according to the NBER’s data going back to 1858.
So there, it is. It’s one month older than the prior record. But there are a few things to note:
This expansion has been slow from the start. Even today, anything to do with housing has yet to recover pre-recession peaks. Housing starts are at around 45% below the crisis. It’s the same with commercial construction, mortgage applications, refinances, existing home sales and new home sales.
Unemployment used to take around 36 months to reach back to pre-recession lows. This time it took 10 years. For the underemployed it took 12 years.
Household net worth never declined in prior recessions. This time it took five years to recover.
Personal income never fell in absolute terms…growth would slow, sure, but it would not decline. This time it fell more than 5%.
The first reaction to the recession back in 2009 was austerity. It seems a long time ago but it took nearly 11 months for QE to start.
You get the picture. A very scared and scarred consumer and a slow return to confidence.
Can it continue? Sure. There is no evidence that the “probability of recession increases with the length of the recovery.” There are no signs that we see right now. We look at housing, claims and unemployment and they're all stable. We think it would take some outside event (yeah, I know that could be anything any day) or an asset price inflation to really bring on a recession.
But outside of that, keep calm and carry on.
2. Another round of tariffs. We saw some respite at last week’s G-20 meeting where both sides (China and America) agreed to keep talking. That was enough to send stocks moving up on Monday and at least postpones the worst. It may even lead to a break through. Meanwhile:
The Commerce Department slapped 450% tariffs on steel coming from Vietnam. The U.S. imports about $30bn of steel and Vietnam’s total exports to the U.S. are about $48bn or about 20% of their economy. So this will hurt Vietnam.
The U.S. Trade Representative added another $4bn of EU goods for additional taxes as a response to European aircraft subsidies (it's the decades old Airbus thing). The total up for tariffs is now $21bn.
This could go on indefinitely, of course. For what it’s worth, we think the U.S. tactics used on China, Japan, Mexico and Canada will fall flat when dealing with the EU. It's not a bi-lateral discussion. It’s one vs. 27. The EU will close ranks very quickly if the U.S. pushes too hard.
Meanwhile, the “uncertainties” the Fed referred to are still front and center.
Bottom Line: Interest-sensitive stocks have done much of the running recently. That’s probably temporary. We'd look for strength in international.
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--Christian Thwaites, Brouwer & Janachowski, LLC
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All charts from Factset unless otherwise noted.