Why You Should Not Be Comfortable With The Level Of The Stock Markets

by: David Frank

Summary

The Dow Jones has set a new record above 17,000.

The NFP came out with a stronger than expected number of 288,000 new jobs for June.

Wage growth remains low, well below the level the Fed would like to see.

The New York Stock Exchange or the Dow Jones Industrials (DJIA) has now reached a new record high. So has the S&P 500. Are they overvalued? Yes they are as they. Why? These levels simply do not equate to any semblance of a strong economic recovery.

The DJIA closed ahead of the long July Fourth weekend above the 17,000 mark. This came after a strong than expected non-farm payrolls (NFP) report which showed 288,000 new jobs were created in June. This is the fifth month in a row the NFP has printed better than 200K new jobs. This has not happened since the 1990's. At this rate, if it keeps up, the unemployment rate could reach and fall under the Fed's target by the end of the year. With the NFP, the unemployment rate fell to 6.1 percent. The problem with the NFP, is not the new jobs created, but the lack of wage pressure. Wages were up two percent which is well below the long term average of three to four percent.

Why is the stock market so high? We are seeing low interest rates and wages are remaining low. Low wages equate to lower costs for business, higher profit margins and better dividend yields. U.S. corporations are also getting a large amount of their profits from emerging markets (EM). While these stock prices remain high, they are a symptom of weakness in the overall health of the economy. It is not a causality that the economy is about to show stronger growth. There is still a great deal of malaise in the economy. We are seeing slack in new home constructions, manufacturing and within the labor market. Especially with stagnate wages.

The labor force still has a very low participation rate. It is well lower than what it was pre-global recession crisis. Real wages is also very weak, they actually came in showing a 0.2 percent loss. These do not point to a very robust economic recovery. In fact, it points to the opposite: a weak and uneven recovery at best. There is also a growing inequality that is dragging on economic growth. From 2009 to 2012, 95 percent of the savings gains went to the upper one percent while the middle class are using up their savings to pay bills and survive. This means, we should not expect to see a consumption recovery anytime soon as well.

The U.S. economic recovery is not on sure footing yet. There are foundation issues, especially in the housing market and with wages. The Fed should take into account these problems before raising rates. The Fed is in the middle of tapering its massive bond buying program, hoping to end it by end of October 2014. They have continued to keep short term rates near zero, amid speculation they will raise them soon. The Fed is correct in keeping them as is. It is still too early to raise rates. While 200K new jobs a month is a good thing, a print of 300K would point to a stronger economic recovery.

There are reasons to be concerned. While there is a feeling of euphoria over the Dow Jones hitting 17,000 and closing above it, do not expect it to stay at this level. There is no real economic growth supporting it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.