Market Strategy Radar Screen Weekly July 10, 2017

 Ain’t No Cure for the Summertime Blues

Despite improved fundamentals, some investors ponder negatively

In spite of a brace of better than expected economic data last week stateside major equity benchmarks just managed to close with a slightly positive bias on the week. The major international indices as tracked by MSCI EAFE (developed markets ex-US and Canada), the MSCI Emerging Markets index and the MSCI Frontier Index slipped respectively 0.48%, 0.82% and 0.07% in the same period.

Even as economic data has improved and consensus earnings estimates project positive revenue and earnings growth in the reporting season ahead for the S&P 500, skeptics and bears appear intent on denying what we believe is the reality that at least for now things appear to be getting better rather than worse.

The June non-farm payroll number released last Friday surprised to the upside as the economy added 222,000 jobs or 44,000 more than the 178,000 expected from a widely regarded survey of economists conducted ahead of the data release.

ISM PMI Manufacturing reported last week for the month of June exceeded survey expectations at a level of 57.8 versus vs. 55.3 expected and ahead of a level of 54.9 in the prior month. The ISM Non-Manufacturing (Services) Composite came in at a level of 57.4, also ahead of survey expectations at a level of 56.5.

The Federal Reserve’s commitment to the process of interest rate normalization and its intention to start unwinding at least some of the debt securities it holds on its balance sheet signal that the economy is expanding at pace—though moderate—is likely sustainable and strong enough to withstand both rate hikes and debt sales.

We’re not singing “Everything’s Coming Up Roses”

There were disappointments among the data released last week but when placed in perspective they were more like blips on the radar screen than indication of a troublesome reversal of positive trends that have developed over the past few years in the transition from economic recovery to economic expansion.

The headline unemployment number (the U-3) edged up to 4.4% in June or just slightly higher than 4.3% in May when the unemployment rate touched a 16-year low. It also should be noted that the headline unemployment number is substantially lower from its October 2009 peak at 10% midst the financial crisis.

The U-6 “Underemployment” number, which includes unemployed and part time workers who would rather be working full-time came in at 8.6% in June versus 8.4% in the prior month. However, we’d note that the U-6 number has come down substantially from its September 2009 peak of 17.1% when the economy struggled with the effects of the Great Recession and financial crisis. Recalling where the employment and jobs numbers have come from places the current numbers in perspective.

Last week’s data showed wage growth remains anemic with Average Hourly Earnings showing a 2.5% increase year-over –year and down from 2.6% in the prior month. It appears to us that the lack of robust wage growth in the current expansion is attributable to a variety of factors including in no small part cyclical and secular (longer term) trends in technology and globalization that keep a lid on wage inflation.

In the week ahead JOLTS Job Openings data on Tuesday along with the release of the Federal Reserve Beige Book midweek and inflation data (the CPI) on Friday should provide investors of all stripes with further clarity on the status of the current economic expansion. The JOLTS number in May topped 6 million jobs posted by corporations that were unfilled. The JOLTS postings among other things reflects the need for training the labor force to meet the requirements of a global workspace which demands tech savvy of its employees whether on the factory floor or in an office facility. Wage growth is likely to remain contained for some time until the work force broadly learns how to game the new technology.

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