By Carlos Guillen
The government's jobs data today was certainly encouraging and is serving to give some hope that government spending cuts and payroll tax increases this year may not have the huge impact on economic growth as many expect.
According to the latest data from the Department of Labor, the unemployment rate in February clocked in at 7.7 percent, landing below the Street's consensus of 7.9 percent and declining from the 7.9 percent posted for the prior month. The household survey showed that those employed climbed by 170,000 and those unemployed declined much more by 300,000, as a good chunk of people moved out of the workforce. In fact, there were 296,000 potential workers that joined those considered not in the labor force, with 166,000 coming from population growth. In essence, the unemployment rate result was not as favorable as it seemed; while it did decline 18 basis points, it was partially assisted by the fact that a large number of people threw in the towel and removed themselves from the work force.
Clearly the more favorable aspect of the employment report was that non-farm payroll employment in February (derived from the establishment survey) increased by more than expected. The report showed that the increase in non-farm payrolls was a whopping 236,000 while the Street's consensus called for a gain of 165,000. The non-farm private payroll gains were 246,000, also beating economists' forecast of 178,000. This result was even higher than that presented by ADP this past Wednesday, which also landed better than Street estimates. According to ADP, 198,000 private sector jobs were gained during February, above the Street's consensus estimate calling for a gain of 150,000 jobs. We should note that during the last 12 months the average monthly gain in non-farm employment has been 164,000, well above the 113,000 we calculate is needed to keep the unemployment situation constant.
In all, the jobs data posted for February was good and has brought another bit of enthusiasm to investors, which in turn has lifted the Dow Jones Industrial Average to yet another new record high, making four straight new record highs this week!
Record High Stock Market Does Not Equate to "Overvalued"
By David Urani
With the market going into record territory, we are hearing plenty of folks suggest that the market is overvalued. We've made this point before but feel it's worth reiterating here: if you look at the valuation of the S&P 500 (even though it's still about 30 points off its own record high), you can see that it is in fact below its average valuation.
On a trailing basis (for the past year's earnings) the S&P 500's price to earnings ratio is right around 15, which is under the 18.8 average since 1989. Also keep in mind that total corporate earnings for the S&P 500 for are expected to hit $29.77 in 4Q, compared to the 2Q07 peak (when the markets previously peaked) of $23.06. That's a 23.9% increase in expected earnings over 2Q07. The price to earnings ratio of those expected earnings is even lower, just 13.91.
We're not going to dismiss that there are some real potholes remaining in the economy including the 2% increase to payroll taxes that went into effect in the new year, as-of-yet unknown effects of the sequester spending cuts, and ongoing struggles in Europe. Consequentially, perhaps it's fair that stocks don't quite carry the same sort of "growth premium" (a.k.a. high valuation based on earnings growth) that they have in the past. But it seems the market has already accounted for that.
So the next time someone tells you the market is "overvalued," ask them based on what valuation, because if you're looking at expected earnings and equity prices based on those earnings as I've laid out above, you could realistically say that the market is in fact undervalued. And as we've also pointed out time and again, a large chunk of those corporate earnings are coming from all around the world, not just here in the US.