November Employment Update: Growth Outlook Intact; S&P Attractively Valued
- I updated my economic composite following the release of the November employment numbers on Friday, December 7.
- The gain in nonfarm payroll of 155,000 was short of the consensus forecast of 198,000.
- However, temp employment was up 8,000, for an annual increase of 2.9%.
- This year’s strength in temps continues to provide support to the economic composite's growth outlook.
- The current market sell-off has pushed the P/E composite to its lowest level in six years, creating an attractive buying opportunity.
I updated my economic composite to reflect the release of the U.S. Labor Department's employment report on December 7. The report showed a rise in nonfarm employment of 155,000 in November. The number was light of expectations. Forecasters were looking for a gain of 198,000, according to Bloomberg News. Preliminary numbers for the previous two months were relatively unchanged. For the trailing six months, nonfarm employment has grown on average a robust 195,000 per month.
Temp employment in November was up 8,000 from the previous month and increased 2.9% year over year. Encouragingly, preliminary figures for September and October were revised upward.
For the last six months, temp employment has risen on average a solid 9,000 per month, for an average increase of 2.8%. It's an encouraging sign that employers are seeing enough strength in their business to hire temps at this pace. As I first noted in early April, they appear to be shrugging off concerns about rising tensions over international trade. They also seem to be unconcerned about a possible yield-curve inversion.
I note that my model includes a factor for the shape of the yield curve. Even if this factor were to reflect an inverted yield curve, the overall score would still be positive. At this point, I think it's more likely that the bond market would adjust to create a more upward sloping yield curve than it is that the trend in leading employment indicators would turn negative.
The November increase in temps was slightly ahead of my forecast, providing more confidence in my estimates.
I'm leaving my forecasts for the BLS temps data series unchanged through the end of the year and into 2019. I continue to look for modest monthly sequential increases in the BLS temps data series and slight annual growth in the ASA series through the next four quarters. As a result, the composite continues to signal economic growth for the next 12 to 18 months. The composite is likely to range from 2.0 to 3.0 through the middle of next year, well into positive territory. I do not expect the economy to tip into recession.
The next Employment Situation report is scheduled to be released on Friday, January 4. I expect to provide an update to the economic composite shortly after the report comes out.
Figure 1 below shows the actual monthly values of the economic composite from 1991 through the present and the estimated values through the middle of 2020. 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.
My composite of publicly available forward P/E estimates puts the current forward P/E on the S&P of 2,655 (intraday Friday, December 7) at 15.9. This is the lowest level since fall 2012, a period of market correction that turned out to be temporary. Back then, investors were concerned that lower government spending, due to the federal sequester that was scheduled to begin January 2013, would cause an economic slowdown in the U.S. At the time, my model was forecasting continued growth.
I think the S&P has become attractively valued. This marks a change from "low end of fair value" in my report from November 5. I consider the current level a solid opportunity to deploy long-term capital in U.S. equities but note the S&P could fall further in this period of high volatility.
Although it may be somewhat backward-looking, S&P earnings were strong in the third quarter. FactSet noted last week that with nearly all of the companies in the S&P 500 having reported earnings so far, 78% of those companies posted a positive earnings surprise. Earnings beats tend to cause analysts to raise their forward earnings estimates, which lowers forward P/Es.
A five-year chart of the valuation composite and the S&P 500 is below. While the S&P has declined about 2% in the last month, the P/E composite has fallen about 4%.
The model's historical record is depicted 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 10% annually.
For a full discussion of the Chartwell method, I refer readers to a description of the process in my April, 2017, employment update, under the heading "Methodology."
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