- Discounting the regularly expected pullbacks and minor corrections, the S&P 500 is going higher, much higher.
- Signals within the labor market are very strong and point to a rapid reacceleration of economic activity that will spur earnings growth as well.
- GDP estimates are robust and call for up to 8% growth this year and I think they are too conservative.
- Earnings are on the rise as are earnings estimates and this is leading the market higher. My target is up to the 5600 range within a couple of years.
Labor Market Strength Points To Accelerating Economic Activity
With COVID-19 still in the air and a new administration stirring things up there is a fair amount of uncertainty in the air. Despite this, the market continues to move higher on a rising tide of stimulus, COVID-driven trends, and reopening activity that has only just begun.
By my estimation, discounting the regular pullbacks and minor corrections that will turn out to be buying opportunities in the S&P 500 (NYSEARCA:SPY), this market has a multi-year bull market ahead of it that could take the index up to the 5,600 range in only the next couple of years. Economic gains are going to be driven by the combination of businesses reopening and labor market strength that are going to create very healthy consumer conditions and drive a cycle of economic growth for both Mainstreet and Wall Street.
The NFP Surges? This Is Just The Beginning
The February NFP was a great report but I will begin this with my usual warning. The NFP is flawed and gets too much attention because it is the product of two estimates that get revised not once but twice; when it comes to the NFP it is the trend and not the headline that you should pay attention to.
Moving on though, the NFP was very strong at 916,000, it beat the consensus estimates by 240,000, and the revisions were positive. Revisions to January and February totaled more than 150,000 and bring the monthly addition to over 1 million. Looking forward, I think the next month could be even stronger. I will not be surprised to see NFP in the range of 4 to 5 million or even higher next month or over the next couple of months.
data collected from the BLS
When the economy shut down it was like turning off a switch. We closed up shop, went on our little COVID-19 vacations, spent tons of money over the Internet, got in touch with the outdoors, and shed 22.2 million jobs just like that. Now, a year into it everybody's ready to get open again and the data is getting stronger on a month-to-month basis. To date, we've added 13.3 million jobs since the slow reopening began and that is going to accelerate. We're not going to get back all the same jobs that we lost but we are on track to see job growth accelerate and could easily recover the 8.9 million net jobs we are still deficit.
Job gains were broad too, and support strength in fundamental industries like trucking, housing, hospitality, and manufacturing. Transportation, plagued by a shortage of drivers and rising demand for freight services, hired 48,000 new employees and many of them at elevated or incentivized rates. Construction, driven by high demand for housing, hired 110,000 new employees and they've been building their workforces for several quarters. Manufacturing, another key area of the economy, hired 53,000 new employees and the ISM data is equally positive. The ISM manufacturing report employment data suggests upward momentum to my technician's eyes.
data collected from ISM's Report On Business
Unemployment Falls, Wages Rise, Participation Steady
Unemployment "edged down" over the month by 0.2% to 6.0% and the lowest level since the shutdowns in the face of rising participation. Labor force participation is mostly flat and steady since the shut-downs but edged up by a tenth over the past month and supported by a 0.2% increase in the labor force to population ratio. I expect to see both of these figures move higher over the coming quarters, gaining acceleration as the vaccine rates increase toward "safety" levels.
data collected from BLS
As for wages, average hourly wages declined by -0.17% for the month driven by increased hiring of lower-wage earners. Even so, the average hourly wage is $29.96 and trending well above the pre-COVID rates at 4.25% YOY.
JOLTS And Challenger Agree, Hiring Conditions Are Strong
The JOLTS report is the most lagging of the employment indicators I regularly track and it shows that even in January when job creation was a tepid 233,000, that job availability was already approaching pre-COVID levels. The job openings rate of 4.6% is a tenth hotter than January 2020 and only 0.2% shy of the 2018 high. The number of jobs currently opened rose to 6.9 million for the month, only 0.2% shy of last year's figure and there are other metrics of note.
The quits rate, a measure of folks leaving their jobs for voluntary reasons assumed to be better work with higher pay, is running at 2.4% and trending at its highest levels ever reflecting a labor market confident of getter better work at a higher rate of pay.
And that is what the Challenger, Gray & Christmas report on layoffs and hirings reflects, a market in need of employees and one that is more willing to pay higher wages. Not only did the number of expected job cuts fall to their lowest level in three (3) years but hiring plans are strong as well. The number of planned hires reported in March is down sequentially but the second highest March on record rounding out the second-strongest first quarter on record, last year being the record.
The KC Fed's LMCI, Keep An Eye On It
The KC Fed's LMCI is arguably the best indicator of labor market conditions but flawed by its lagging quality as well. The latest read is for February and from early in the month at that. This month, the statement includes words to the effect that labor market conditions improved during the latter half of the month, and in the month since, making this month's read a very conservative estimation of current conditions.
These readings likely do not fully describe the state of the labor market at the end of February, as many of the input data series reflect conditions early in the month. In particular, the series do not include the effects of the decrease in new COVID-19 cases or the acceleration in vaccine administration that occurred later in the month. For example, data from the Bureau of Labor Statistics’ Household Survey are from the reference period of February 7 through February 13. Additionally, the most recent data from the Job Openings and Labor Turnover Survey (JOLTS) are for January. Therefore, labor market developments in the latter half of February, including the labor market response to recent COVID-19 developments, will likely show up in the March 2021 LMCI readings.
The takeaway here is that activity is rising and momentum is not only positive but reaccelerating from levels deemed strong in the pre-COVID times. The signal to watch for is the activity line, when it crosses zero and goes positive it will indicate a prolonged period of economic growth that has historically been punctuated by spikes of GDP above 5.0%.
GDP Estimates Are Robust
The Atlanta Fed's GDPNow tool is tracking down a bit from its highs but still shows Q1 GDP in the range of 6%. That's the highest quarterly pace in a decade and one supported by the massive reopening and employment trends.
The estimates from analysts and economists are varied but have a consensus in the upper mid-single digits. The Conference Board is among the weakest of the recent estimates at 3.0% in Q1 and 5.5% for the year. Fitch and Bank of America (BAC) both see the U.S. growing near 6.0% to 6.5% and Goldman Sachs is expecting 8%. The takeaway here is that activity is expected to accelerate in the second half of the year and the rebond already looks pretty strong. In my view, this is setting us up for a round of sustained and potentially sharp upward revisions from the analysts and that has already begun.
Earnings Revisions, Gotta Love 'Em
Earnings are the key driver of the market, when earnings are good the market is good and when earnings are bad the market is bad. What many investors fail to realize is that today's stock market prices are based on what tomorrow's earnings are expected to be. That's why the trajectory of earnings growth and the trajectory of earnings estimates is important and both are on the rise. With earnings growth expected to accelerate over the next two quarters and the estimates moving higher the earnings tailwinds are blowing hard.
data collected from FactSet Insight
The only downside is that earnings growth will peak after the next quarter and that may be a cliff the market falls over. The comps in the coming quarter are driven by last year's rapid economic shutdown, from the quarter on the comps start to get tougher. The silver lining is that earnings growth is positive, that estimates continue to shift and right now they are shifting toward the better. With earnings revisions on the rise and economic activity accelerating, we can only expect the outlook for 2021 to continue rising as well.
Record High P/E For The S&P 500 Foreshadows Higher Index Prices
The S&P 500 is trading nearly 22X its times forward earnings and at the highest level in over a decade presenting a bit of a problem. At this level, the index is ripe for a correction and that situation would be enhanced by weaker than expected performance by index companies should they fail to meet expectations. Until then, the index is getting dragged higher by rising estimates for earnings and will continue to rise until that situation ends.
The risk for investors and traders is frothiness. At this level and valuation, the market is not only ripe for a correction but the market is also expecting one. Any bit of new, no matter how good, will have a negative impact on the market if it fails to meet expectations and that will spark knee-jerk selling. In this case, those knee-jerk selling events should be viewed as buying opportunities because the secular trends remain up.
This rally began way back in 2009 when the S&P 500 bounced off of its $800 support line. Ironically, my very first article on Seeking Alpha is titled "We Are In A Secular Bull Market", dated 2014. The rally gained traction all through the Obama years and went into overdrive during the Trump administration. The Trump years also sent the market into a consolidation due to the Trade War and now that consolidation is broken. The break-out truly began in the two months before COVID-19 began, labor market strength was accelerating then as it is now and leading the market higher but that was then, this is now.
Now, post COVID-19-correction and rebound, the S&P 500 is trading up at new highs and not only confirming the uptrend but the acceleration of that trend. That acceleration is marked by noticeable convergence in both the stochastic and MACD indicators. Convergence, as you know is indicative of underlying strength and tends to result in new highs or at least a retest of the current highs in the event of a correction. In my view, the market up for another five to ten-year run before the secular bull market runs its course.
In the event that there is a correction soon, and the weekly charts show the most evidence of this, the closest target for strong support is near 3,800 or about 8% below the current price action. There are targets above this, near 3,850 and 3,900, but they may not hold up under strong selling.
The economic reopening is already underway, the evidence is in the labor data, and it is going to get much stronger before it gets weaker. This is driving not only consumer health but also corporate strength during a time of accelerating earnings and rising earnings estimates. The S&P 500 is trading at historic valuations right now but, unlike in the past, this is foreshadowing higher index prices driven by increasing revenue and earnings leverage gained during the pandemic.
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Analyst’s 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.
I'm not long the S&P 500 but I hold positions in many S&P 500 companies including WBA, JPM, JBHT, KMI, KHC, KR, and PEP.
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