Dow Fails at 20,000 & Payrolls Data: More Of The Same

The Dow trying to hit 20,000 is like Shaquille O’Neal attempting free throws. Shaq was a great basketball player, but he wasn’t a great free throw shooter. The market is strong either way, but this milestone keeps failing to be reached. As you can see from the chart below, the Dow missed reaching 20,000 eight times today. The Dow came within a fraction of one point of reaching 20,000 today, but missed the mark again. It’s been a 3-week journey to reach 20,000. While some say the 20,000 is an elusive ceiling, I think it is what is keeping the market overbought. I think it would have sold off by now if the Dow wasn’t near this mark. I’m not saying it will sell off once the mark is reached because I do think some retail money will come in to chase it even higher. It will likely hit 20,000 next week as it needs to rise less than 40 more points.

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I am still very bearish on stocks. I look at the 2016 year as one that came close to a recession, but the stars didn’t align properly. Just because it was evaded in 2016, doesn’t mean the cycle is over and a new one is being started. Saying there will be no recession is the ultimate use of the ‘this time is different’ fallacy. I have a friend who works at the Fed who tells me recessions are a conspiracy theory. When exuberance is high we hear interestingly absurd statements like this.

My favorite indicator to look at is the US Fitch Fundamentals Index. There’s two negative about the index. The first is it doesn’t have a long track record, as you can see it only goes back to 2004. The second is it is delayed, as you can see it has been last updated in Q3. I like how the index is broken down into so many subcategories to give you an overview of the economy. The index rebounded one point to -1 from -2. The slope of the line in this recovery shows how long it has been. The economy quickly fell into a recession last cycle, but this time the index has been moving gingerly lower. At the start of the last recession, it was at -4, so you can see why I was on recession watch when it was at -2 in Q2 2016. With it rising in Q3, this indicator shows we may not see a recession in the first half of 2017.

There are two sub-components which I view as important to point out. The first is the one I have selected in the chart below. A big reason why the index increased was because of the increase in high yield recovery rates. High yield recovery rates are one of the indicators I look at to determine the health of the credit market. Given the recovery rates were at record lows in 2016, it led me to believe a recession was coming. I knew they were being weighed down by energy and mining, but I thought other sectors would pick up the negative slack as there’s always an industry that leads the economy lower. I wasn’t expecting the oil price crash to cause a recession; I was merely expecting energy and mining to lead the economy lower. This was a wrong prediction as the energy market has rebounded without any other sector crashing enough to offset it. This rebound in energy is why the high yield recovery rates have gotten healthier. The index went from -10 to -5.

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The mortgage performance is the other important indicator I want to focus on. It fell from 10 to 5. This is likely because of the rise in interest rates. I expect it to further fall or remain at 5 as interest rates remained relatively high. However, oil prices did rally in Q4 so the recovery rates could move higher to offset this weakness. I expect the Q4 Fitch index to be either at -1 or 0 based on some of the business and consumer optimism we saw after the election.

Today’s big metric reported was the non-farm payrolls number. The market continued its solid record of rallying the day of the report regardless of whether it meets, misses, or beats expectations. Today’s report was a moderate miss as there was 156,000 jobs gained compared to the 180,000 jobs expected. It’s a continuation of slowing labor growth. The average gains in 2014 were 248,000 per month which was the peak. It fell to 225,000 per month in 2015. The average in 2016 was 180,000 with Q4 only averaging 165,000. The only way the unemployment rate can decrease further with this rate of jobs growth is if the labor participation rate falls more.

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The chart showing the unemployment rate is great, but the jobless claims data is even better if the metrics are accurate depictions of the labor market. The jobless claims on Thursday were 235,000 which seems like an impossible number. No economist 5 years ago would have predicted such a possibility because this is near a 43 year low while the population has increased steadily during that time period. This is a near the all-time low for the population adjusted jobless claims. (Jobless claims were 2,000 lower at the end of October.)

The reason why I put a caveat on the NFP and jobless claims data is because they don’t show as good of a picture of the labor market as they used to. This is because the number of people not in the labor market has exploded as you can see in the chart below. The number of people not in the labor market increased by 841,000 in the past 3 months. This is being caused by people giving up looking for work and those working as independent contractors. Part of the reason for the increase in independent contractors is health care costs have made it too expensive to hire full time workers. Let’s see what the new health care plan, which will be proposed this year by the GOP, brings.

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The big headline from the NFP report was the increase in hourly earnings. As you can see from the chart below, the hourly earnings increased 2.9% which set a new cycle high as the labor market tightens and some workers’ pay increases.

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There always seems to be a chink in the armor of the optimism surrounding data points in this weak recovery. As you can see from the chart below, the average weekly earnings from all workers remained in the 2%-2.5% growth range it has been in for the past 5 years. The hourly earnings increased, but the hours worked counteracted that by falling. Therefore, the workers aren’t getting the level of pay raise promoted by the media.

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