Macro Update: Finally Back in the Green (albeit barely) — And — On Jobs and Stocks

Finally, after 15 months without a positive overall score, our proprietary macro index peeked its nose above the zero line this week, albeit barely, coming in at +2.04:

Auto sales, up for a second consecutive month (although with a decelerating rate of change), finally breaking above its downward trend line made the difference:

While that was our only input whose trend garnered a change in score, there are a few others worth taking a peek at.

Consumer confidence, for example, remains uninspiring:

As does rail traffic of late:

The Global Purchasing Managers Index, while sill signaling expansionary conditions (above 50), is looking a bit toppy:

What continues to scream higher (and, by the way, holds prominent sway in our core portfolio these days) are commodities:

The Bloomberg Commodity Index:

The CRB Raw Industrial Materials Index:

Speaking of rising commodity prices, while there’s quite the divide in the economist community among those who think that notably rising inflation will be the trend going forward, versus those who see, among other major headwinds, a massive disinflationary debt overhang, the latest from the Institute for Supply Management Purchasing Manager Surveys favors the former.

Here’s from the January manufacturing survey:  emphasis mine…

The ISM® Prices Index registered 82.1 percent, an increase of 4.5 percentage points compared to the December reading of 77.6 percent, indicating raw materials prices increased for the eighth consecutive month. This is the highest reading since April 2011, when the index registered 82.6 percent. “Aluminum, brass, copper, chemicals, steel, soy and corn products, petroleum-based products including plastics, transportation costs, electrical and electronic components, corrugate, wood and lumber products all continued to record price increases,” says Fiore. A Prices Index above 52.7 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.

All 18 industries reported paying increased prices for raw materials in January…”

And while the services survey’s price subindex came in slightly below its December reading… well, here’s from the report:

“The 16 services industries that reported an increase in prices paid during the month of January — listed in order — are: Wholesale Trade; Construction; Agriculture, Forestry, Fishing & Hunting; Retail Trade; Accommodation & Food Services; Mining; Arts, Entertainment & Recreation; Transportation & Warehousing; Health Care & Social Assistance; Professional, Scientific & Technical Services; Public Administration; Utilities; Management of Companies & Support Services; Other Services; Finance & Insurance; and Educational Services. No industry reported a decrease in prices paid for January.

The fundamental question of course being, what’s causing the “inflation?” Is it rapidly rising demand or burdensome supply constraints? Or a bit of both?

I’ll highlight spots in the manufacturing survey’s featured respondent comments that offer clues: 

Supplier factory capacity is well utilized. Increased demand, labor constraints and upstream supply delays are pushing lead times. This is more prevalent with international than U.S.-based suppliers.” (Computer & Electronic Products)

“Business remains strong. Manufacturing running at full capacity.” (Chemical Products)
“Very strong demand with limitations in supply to meet increased demand.” (Transportation Equipment)

“Labor continues to be one of our largest challenges.” (Food, Beverage & Tobacco Products)

“Our current business demand is going way past pre-COVID-19 [levels].” (Fabricated Metal Products)

“Business is very good. Customer inventories are low, with a significant order backlog through April. Supply base is struggling to keep up with demand, disrupting our production here and there. Raw material lead times have been extended. COVID-19 continues to cause challenges throughout the supply chain. Huge logistics challenges, especially in getting product through ports and in getting containers. We are seeing significant cost increases in logistics and raw materials.” (Machinery)

“We have had an increase in employees testing positive for COVID-19, negatively impacting manufacturing.” (Miscellaneous Manufacturing)

“2020 growth at 5 percent during a very challenging and volatile year. 2021 is expected to bring growth at a 7-percent or even greater pace. Logistics is the critical concern, but we are currently abating risk.” (Electrical Equipment, Appliances & Components)

“January 2021 started with strong orders for plastic components in auto, electrical and other sectors. The industry outlook is optimistic. Looking at investing in new equipment for anticipated demand later this year. Reshoring is taking hold, with new customer potential.” (Plastics & Rubber Products)

“Business is improving, but we are still struggling with a shortage of available labor.” (Primary Metals)

Clearly, it’s a bit of both… 

Let’s now zero in on jobs and the stock market:

Despite the legitimately optimistic feel we get from those snippets from the ISM surveys, I simply can’t overstate how were it not for literally trillions of dollars worth of ongoing government stimulus we’d be mired in protracted recessionary/deflationary/bear market conditions.

The underlying jobs data vividly emphasizes the point: 

Here’s the “U.S. Employment Total In Labor Force” 5-year chart:

Note the very toppy look of late… At the present pace it’ll take 4+ years to recapture that pre-recession peak.

Of course recapturing all of the jobs lost during a deep recession is never an overnight affair.

Note how long (4.5 years) it took after the ’08 recession:

The early 2000’s recession, however, was not “deep”. In fact it was very mild (despite the tech wreck), and, thus, the jobs number fully recovered in less than a year:

Ah, but what about the stock market? How long did it take to recover its pre-recession peak in those previous two instances?

The bottom panel is the S&P 500 Index, which, as you can see, took nearly as long (4.1 years) as did the jobs market to recapture its pre-recession glory from the 2009 bottom:

As for the historically light, and brief, early-00’s recession, while jobs bounced back quickly, the stock market took 4.75 years to get from trough back to pre-recession peak:

And then, alas, only to roll right back over into the epic 2007-2009 bear market:

All told, going back to the tech bubble, it took literally 13 years (peak to peak) for the S&P 500 Index (bottom panel) to finally push sustainably above its April 2000 peak!

13 years!! 

Note: In case you’re wondering what has us hedging portfolios while stocks meander into all time higher territory… well, frankly, the present setup in far too many respects smells very much like 1999’s… So now you know!

Now back to the present…

Yes, we’ve experienced an absolutely historic loss of jobs (with millions deemed permanently lost), along with (remarkably!) an insane, and unprecedented, rebound in stocks (taking only 5 months to recapture their pre-COVID peak):

So, would one be foolish to believe that all’s well and, thus, load up the truck with stocks, as if the next big bull market is well underway? 

Well, let’s just say that — given how general conditions are so atypical of past sustained bull market beginnings (quite the opposite, in fact) — it would be exceedingly dangerous!

In closing, all of the above said (you clients), while of course we’re actively hedging against what we see as major downside risk, we’re nevertheless expressing our thesis in terms of where we see fundamentally legitimate opportunities going forward. 

Which means that, while we remain broadly diversified, we have a tilt toward commodities and materials — think weak (on a long-term trend basis) dollar, low interest rates and major infrastructure spending going forward. As well as toward non-US developed and emerging economies — think weak (trending) dollar, along with more compelling valuations and dividend income (in developed markets in particular), and greater growth potential, along with favorable demographics, in the emerging markets…

Have a nice weekend!

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