ASA Temps Data: In Line With Expectations; Confirms Expansion Forecast

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by: Chris Joseph, CFA

Summary

I updated my economic composite to include data from the American Staffing Association’s report on the temporary staffing industry for the first quarter, released earlier this month.

The report showed a 0.5% year-over-year decline in the number of temp and contract workers. The figure was a little short of my estimate.

My economic composite continues to suggest the U.S. economy remains on a growth trend, supported by strength in other composite inputs.

The valuation model finds the S&P 500 is richly valued.

Economic Composite

I updated my economic composite to reflect the June 5 release of the American Staffing Association's ("ASA") staffing employment and sales report for the first quarter of this year.

The report showed that U.S. staffing companies employed an average of 3.07 million temporary and contract workers per week in Q1. This represents a decline of just 0.5% from 1Q16.

The reported data fell short of my estimate of 3.24 million workers, which represented an increase of 0.5%. At just 5% short of my estimate, I figure the miss is within the margin of error. The small decline actually represents an improvement in the trend for this data series, which has been registering 2% year-over-year declines in the previous three quarters.

Since the report was close to my estimate, I have little change to my quarterly forecasts for the ASA data series through this year. I continue to model modest sequential quarterly increases in the number of temps, representing low single-digit year-over-year declines.

Fortunately, the temp employment data series from the Bureau of Labor Statistics has been trending stronger than the ASA series. The outlook for the BLS series is decidedly more upbeat, as I discussed in my article of June 2. On this and other positive inputs, the composite continues to signal economic growth for the next 12 to 18 months. I expect the composite will range from 2.0 to nearly 4.0 through June 2018. I do not think the economy will tip into recession.

The next update to the model is likely to be July 7, when the Labor Department is scheduled to release its report on the June employment picture.

Figure 1 below shows the actual monthly values of the economic composite from 1991 through the present and the estimated values through early 2019. In general, the composite remains positive during periods of economic expansion and turns negative during periods of recession. The vertical dashed lines mark the inflection points when the economy is poised to enter recession or has safely exited recession. It typically takes three consecutive months of a change in sign (from positive to negative and vice versa) to confirm a change in outlook.

Valuation Composite

My composite of publicly available forward P/E estimates puts the current forward P/E on the S&P at Wednesday's close (June 21) of 2,436 at 19.5.

I consider this toward the high end of fair value. My concern is that the market is vulnerable to an external shock.

I would prefer to buy more aggressively at a lower P/E, perhaps around 17.0, which would equate to roughly 2,100 on the S&P. However, I would continue to make regularly planned dollar-cost averaging allocations to equities that investors intend to hold for the long term, such as monthly or bi-weekly contributions to a 401(k) plan.

I don't recommend investors shy away from what appears to be an elevated stock market during periods of economic expansion, like the current environment. In expansionary periods, companies have the ability to grow into their P/Es by raising their earnings per share. What looks like a rich market P/E today may be more reasonable six to twelve months later as the "E" in "P/E" moves higher. The rise in temp workers in particular is an indication of higher earnings in the near future: firms have productive work for these employees to do - productive work that should translate into higher earnings per share down the road.

A five-year chart of the valuation composite and the S&P 500 is below. The S&P has climbed nearly 8% this year, even while the market P/E has remained roughly steady and elevated. This, I believe, is a result of companies, as I mentioned above, growing into their P/Es by improving their earnings.

Methodology

For a full discussion of the Chartwell method, I refer readers to a description of the process in my April employment update, under the heading "Methodology."

Track Record

The model's historical record can be seen in the chart below. The economic composite predicted the beginning and end of the 2000 recession and the 2008 recession. It also predicted the end of the early 1990s recession. Some of the data series used in the composite did not exist before 1990; hence, the start of the track record at that time.

In the two historical Overweight periods, the S&P rose 13% and 14% on an annualized basis. In the two historical Underweight periods, the S&P fell 18% and 9% on an annualized basis. In the current Overweight period, the S&P has been returning 11% annually.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.