NZAC - The State Of The Market And Economy At Mid-Quarter
Summary
- America and the world keep dodging recessions, like they did last year. The IMF just raised its 2023 global growth rate projection to 2.9% (from 2.7% last October), and they raised their U.S. GDP projection from +1.0% to +1.4% now.
- A 1.4% growth rate is not very exciting, but it’s not a recession, and it’s cushier than a normal "soft landing."
- Stocks have already voted in favor of this “no landing” kind of year. The MSCI World Stock Index is up 6.6% so far this year through last Friday.
- The U.S. GDP grew by +3.2% in the third quarter and a preliminary +2.9% in the final quarter. No recession there.
By Gary Alexander
The State of the Union (SOTU) speech has become a political rally for one side and a bore for the other, so let’s talk money. For the right-brain or heart-driven among us, today is Valentine’s Day. For the left-brainers, it’s the middle of the first quarter and time for a half-time report on likely market outcomes.
While most pundits talk of the economic Super Bowl struggle between the Hard-Landing Bears and Soft-Landing Bulls, Ed Yardeni (and I) don’t care much for the metaphor of “landings” at all, as that implies an end to the ride. When planes land, people get out and go home, but economies must keep on flying.
Yardeni now has a “no landing” scenario. America and the world just keep dodging recessions, like they did last year. The International Monetary Fund just raised its 2023 global growth rate projection to 2.9% (from 2.7% last October), and they raised their U.S. GDP projection from +1.0% to +1.4% now. A 1.4% growth rate is not very exciting, but it’s not a recession, and it’s cushier than a normal “soft landing” (see Reuters, January 30, 2023: “IMF lifts 2023 growth forecast on China reopening, strength in U.S., Europe”).
Stocks have already voted in favor of this “no landing” kind of year. The MSCI World Stock Index is up 6.6% so far this year through last Friday. Matching that average, I see Japan’s Nikkei 225 is up 6.74% and Britain’s FTSE 100 is +5.78%. Going back to last October 12, the numbers are far larger. Since October 12, Europe is up 31.4% in overall market gains. Their mild winter has supercharged their stocks.
According to Yardeni, from October 12, 2022, to January 27, 2023, Poland’s market is up 60.4% and Hungary rose 52.3%. Among Europe’s top economies, Italy is best (+42.5%), followed by Germany (+41.6). Then comes another surprise - Covid-phobic China is up 38.6, even though it just recently emerged from its lockdown shell. From 2008 to 2022, the U.S. beat the rest of the world by over 200%, but the ratio of the US MSCI to the All-Country World ex-US MSCI (in dollars) peaked on October 28:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Turning to the U.S., we have a mixed bag of signals in the first six weeks of 2023, with the blue chip Dow and S&P 500 up only 2.2% and 3.8%, respectively, while the risk-oriented NASDAQ and Russell 2000 are up almost 9% and 12% in their respective gambling dens, showing that the “risk-on” crowd is feeling frisky. Meanwhile, the risk premium on junk bonds (sub-investment grade debt) was recently at its lowest since the second quarter of last year, and 10-year Treasury bond rates - though rising - are still below 4%.
The bull market scenario is buttressed by the breadth of the market. As Jason Bodner has said here , and Ed Yardeni has also documented, Growth sectors are leading the way. Since the October 12 low, says Yardeni, the top five (of 11) S&P sectors in market gains (through January 31) are Materials (+21.8%), Financials (+19.8%), Real Estate (+19.0%), Information Technology (+16.8%) and Energy (+13.7%).
While the 8 to 10 mega-cap stocks have faded, the S&P Equal Weighted Total Return (+18.1%) index has far outpaced the overall S&P 500 (+13.8%) since October 12. That shows much wider market breadth.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Also, the U.S. GDP grew by +3.2% in the third quarter and a preliminary +2.9% in the final quarter. No recession there. The bullish January jobs report looks like the clincher, but there’s more to that story...
517,000 New Jobs and 3.4% Jobless Rates Don’t Scream “Recession Coming”
On Friday, February 3, we heard the shocking news that 517,000 new jobs were created in January, and the unemployment tied a 54-year low of 3.4%, reaching what could be the lowest rate in 70 years.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Obviously, neither number implies a recession right around the corner, and probably not for a long time, but is either number reliable? How are they calculated? Let’s look at how each statistic is calculated.
#1 - The number of new jobs is “seasonally adjusted.” For January, this takes into account the expected temporary job losses after the Christmas season layoffs in January, or any weather-related layoffs.
These seasonal adjustments are declared in advance, not after the fact, so the seasonal assumption going into January was that just over three million jobs should be added to the January totals. Since the raw numbers were 2.5 million fewer jobs, they added 3 million and got around +500,000, a thoroughly fictional number. Months in advance, the BLS expected more bad weather, more retail layoffs and other cyclical adjustments. (This, of course, makes me ask: Is it a real job if a holiday or the weather can kill it?)
In contrast, February’s total of “new jobs” will need to subtract about 750,000 jobs from the total, even though February could turn out to be colder than January! There’s no way to predict weather in advance.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
January’s weather obviously wasn’t as brutal as expected. There was also a resolution to the California higher education strike. Over the year, all of these anomalies might even out, but the January job total was a gift to President Biden in his State of the Union talk, and a blow to gold, bonds and the stock market.
#2 - The second misconception is the Unemployment Rate of 3.4%, which is meaningless when so many able-bodied American have dropped out of the Labor Force. The number of men (16 years of age and older) not in the Labor Force has almost doubled since 1990, according to the Bureau of Labor Statistics:
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The December “JOLTS” (Job Openings and Labor Turnover Survey) report, released February 1, showed that job openings rose 572,000 in December, so there were nearly two job openings for each unemployed person - or 11 million job openings for 5.8 million unemployed - plus 100 million not in the labor force.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
So, until a good portion of these hundred million are hungry enough to work, there is no recession.
All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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The State Of The Market And Economy At Mid-Quarter