Every month I sit in on Economist Fritz Meyer’s Economic Update webinars. I find Fritz to be informative, clear and concise and a huge help in providing SageBroadview with an appropriate perspective on economic events. This month he shared that he sees continued economic expansion and slow but steady progress on new job formation.
Below we share some of the charts from his April 2014 Monthly Economic Update we found to be particularly interesting.
Okay, I admit that I geek out over charts but you might find it refreshing to read some good economic news for a change when often the headlines are telling us how bleak it is out there.
CURRENT BULL MARKET:
It’s anybody’s guess, of course, when the next -20% market swoon will come – 20% being the definition of a bear market correction. However, we are familiar with the key conditions that have accompanied bear markets of the past — restrictive Fed policy, signs of increased likelihood of recession, stock market overvaluation and irrational exuberance on the part of investors –and we don’t see any of them in evidence today.
The big picture conclusions I see evident in this chart are:
a) past post-recession jobs recoveries have been very choppy so don’t expect straight-line improvement; and
b) net monthly job formation of zero or less has occurred historically even as the economy remained in expansion mode.
PRIVATE SECTOR VS. GOVERNMENT JOBS:
Looking behind the aggregate monthly new jobs statistics it is clear that pretty good private sector job formation has been modestly offset by steady contraction in government job formation.
Contrary to an often-heard refrain that “higher bond yields will be bad for stocks”, in fact, rising bond yields have been entirely consistent with bull markets in stocks, as you can see marked by the grey arrows in this chart. Even in 1994, when the 10-year Treasury bond yield went from 5.5% to 8.0%, stocks went sideways, not down. A key difference between now and 1994 is that in 1994 the real yield went from 3% to 6% – high real yields in absolute terms. Whereas today the real yield is just 1.6%, perhaps leaving substantial room for yields to rise before impinging on economic growth.
The bottom line is that rising bond yields have been symptomatic of improving economic momentum, hence are consistent with economic expansion and a healthy stock market. The media so often gets this exactly wrong.
- Economists see continued economic expansion.
- Slow but steady progress on new job formation.
- Consumers’ savings and liquidity have recovered.
- Household net worth has recovered – deleveraging is done.
- Significant skew in income, spending is relevant to economic recovery. Retail sales have come roaring back.
- The U.S. economy is positioned to continue a +2 to +2½% long-term trend rate of growth.
- Positive changes in manufacturing.
- Inflation is subdued and will probably remain so until there are signs of wage inflation – which may be a ways off.
- The CBO projects massive budget deficits if current revenue and spending policies continue.
- Continuing improvement in the economic data has been a catalyst for stocks.
- Stocks climbed the Wall of Worry to new highs even as consumer sentiment has remained depressed.
- Stocks are still reasonably valued on estimated earnings.
- If the “taper” results in higher bond yields it’s not necessarily bad for the economy and stocks.
- Total return on bonds cannot continue recent years’ returns but should be positive.
- Municipal bonds are attractive.
The views and opinions expressed are those of the speaker and are subject to change based on factors such as market and economic conditions. These views and opinions are not an offer to buy a particular security and should not be relied upon as investment advice. Past performance cannot guarantee comparable future results.
Sage Serendipity: After reading all these charts, are your eyes glazing over? Do you find yourself reaching for an adult beverage, okay, more like beverages, and ordering a pizza or two? If so, keep in mind that there are 74,476 Reasons You Should Always Get The Bigger Pizza.