Market Update: Sept 3, 2023
Job Data and Rate Hikes
Recent job data suggests a softening in the marketplace. Job openings fell to 8.8M and were expected to come in at 9.4M. Quit rates dropped, suggesting people were less certain about obtaining another job if they quit. To bolster that data, jobless claims increased to 1.7M. Non-Farm payrolls increased by 187,000. Unemployment rose to 3.8% driven by an increase in the participation rate to 62.8. The Participation Rate is a description of the percentage of the work force currently looking for employment. As the number increases, it indicates that more people are looking for work or are working. As this number increases, if people are not employed, the unemployment number rises. In recent years, this number has declined and, along with it, the unemployment number. This leads many to believe that the unemployment rate may not be the best indicator of the economy's health.
Yield Curve & The Flattening Inversion (oh ... that will make you sound smart at your next dinner party)
The yield curve, which compares short-term and long-term bond values, remains a focal point. An inverted curve suggests people are more willing to take the risk associate with long term lending than short term lending. Currently inverted due to rising interest rates and a uncertain economic situation, short-term bonds are paying a higher rate than long-term bonds. Odds of a rate hike shifted in favor of no rate hike. Somehow, interest rates on bonds increased on Friday after a steady decline through the week. Despite that, the difference between short term and long term bonds continues to level out. This is a good sign for the economy.
GDP and GDI
Q4 2023 (-3.3) and Q1 2024 (-1.8) gross domestic income showed consecutive quarters of contraction of GDI. GDI is the Gross Domestic Income. GDI is an alternative way of measuring the nation's economy, by counting the incomes earned and costs incurred in production. The average of GDP and GDI for the year was 0.1 in Q1 and 1.3 in Q2. This is a far cry from the real GDP currently being shown by the Atlanta Fed's GDPNow.
GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow - the estimate is based solely on the mathematical results of the model.
On August 15, retail sales came in much better than expected which significantly raised the GDP forecast from 4.1% to 5%. The next day (August 16), the GDP forecast increased to 5.8% because of housing starts and boosts in industrial production. The residential investments part of the GDP formula grew from the new housing starts. Here’s the drawback of these results. The Fed will most likely be displeased from this data and it will likely raise inflationary pressure because it shows triple the trend growth than what was expected.
Housing & OAS
The Primary Mortgage Market Survey shows 30-yr. Fixed Rate Mortgages (FRM) are up to 7.18% and 15-yr. FRM are at 6.55%.
Mortgage applications are up 2.3% and homebuilders are still reporting major pullbacks across the board. After consistently reporting all-time highs, home developers are reporting an average loss of 5.53%. The housing price index rose in June 0.3% and YoY is showing a 3.1% increase ... so much for that pullback. This while mortgage rates have increased 300bps!
Productivity and the S&P 500
The S&P's closing multiple at the end of last week (9/1) was 19.44x. Institutional investors often compare long term bond returns to potential equity returns. The difference between these two investments is called Equity Risk Premium. In other words, I'm taking a lot more risk with stocks, how much am I getting paid for that risk? At the moment, we see long term bonds (20yr) providing a 4.48% return. Based on the current S&P earnings and the state of the economy, the presumed equity return is 5.14%. That is only 0.66% of return for taking on substantially more risk. You can buy corporate bonds that provide returns in excess of the estimated equity return.
So, what does that mean? It appears the S&P is a little expensive at the moment. What is the answer to this dilemma? Productivity.
Much of the returns from the last 4 decades has been the result of the computer and internet revolution making each worker for more productive. This is the reason AI receives so much attention. It provides the ability of each worker to accomplish that much more with their time.
This newsletter is a synopsis of a continual series of updates by a market analyst Mark Meldrum. Mark Meldrum is a CFA that provides weekly updates on the market, but they tend to be an hour long. Here is a synopsis of his video found here.
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