Well, while Tuesday’s rally marked the best presidential Election Day performance since 1984, that bounce was followed by yesterday’s slide, a decline that marked the biggest plunge following a presidential election since the Dow’s inception.
The fact that four Senate seats remain undecided (and hence uncertainty continues over whether the Senate will have filibuster power or not) and the stimulus plans being discussed has not exactly inspired investors certainly didn’t help things. On this same note, as the market is eager to learn the make-up of the Obama economic team, the front runner for either Treasury Secretary or economic advisor is Larry Summers. This is someone who believes stimulus in the form of rebate checks and increased jobless benefits is the best thing since sliced bread, thus talk of the pick failed boost investor sentiment.
So, the market rallies one day and falters the next – the basic story continues.
The retreat halted an 18.5% rebound from the S&P 500’s five-year low reached on October 27 – a nearly uninterrupted snap-back over the previous six sessions.
Market Activity for November 5, 2008
Financial, consumer discretionary, basic materials and energy shares took the brunt of the damage – the same sectors that drove the rally the day prior. There is no way to rationalize this market, all you can do is invest in companies that are leaders in their respective industries, offer the most attractive valuations and diversify among asset classes. Oh, and of course, have patience.
Economy
On the economic front, the ADP employment report fell 157,000 for October – a larger-than-expected decline by 50,000. This is a preliminary report the market looks to for clues on how the official Labor Department’s monthly jobs figure turns out. ADP is often a good degree off base regarding the amount of change but worth reporting nevertheless as it’s direction is typically accurate.
(Our feel is the level of job losses ADP is suggesting is relatively accurate this time – even as the official numbers will be worse)
The ADP report noted its October reading did not reflect the strike of some 27,000 Boeing machinists. The Labor Department’s October Strike Report did note 27,000 were on strike last month, so this will be reflected in Friday’s jobs report and thus if ADP is close to accurate we’ll get the 200,000 decline in payrolls we believe is likely.
In terms of job segments, ADP showed a 126,000 decline in goods-producing employment – manufacturing down 85,000 and construction down 45,000. Service-sector jobs declined 31,000 in October, according to ADP.
In a separate report, the ISM Non-Manufacturing Index (service-sector survey) showed activity contracted after spending the past eight months hovering around the line that demarks expansion from contraction. This index -- which equally weights the business activity, employment, new orders and supplier delivery indexes – fell to the lowest reading on record, falling to 44.4 for October after 50.2 in September. (The data only goes back to 1997, so keep in mind not a lot of history here)
For some perspective, the index spent 57 straight months (68% of this run in robust territory) in expansion mode prior to the weakening that occurred this year. Beginning in January 2008 the service sector began to deteriorate, although remained somewhat upbeat. Last month as the credit event began to take hold, the degree of weakness became evident as all other economic data sets have indicated – fourth-quarter GDP will post a negative reading. This decline in real GDP will not be a tepid one such as the downturn of 2001 but a decline that is in line with the typical recession, roughly -3.00% at an annual rate.
The index’s employment survey hit 41.2, also the lowest on record. This corroborates the ADP survey that Friday’s jobs report is going to show significant decline. If we do get a decline of something like 200,000 it shouldn’t come as a surprise after these reports and thus the market may take the news with a degree of equanimity.
We’ll also note that the job losses for the first nine months of the year have been mild relative to the normal labor-market contraction. Tomorrow’s October jobs report will show the slash and burn has begun as we should see a string of monthly losses of at least 150,000. For context, the 1990-1991 recession saw five months of monthly job losses that totaled at least 150,000 with a 300,000 loss thrown in the mix. Thus far the current labor-market downturn has posted just one reading of 150,000 as the average monthly decline has been mild at 84,000.
Earnings
I do like to offer some bright side after negative remarks like the statements above, and there is optimism to speak of as third-quarter earnings have come in much better than expected.
Overall S&P 500 operating earnings fell 10.5% in the third-quarter, largely due to financial-sector profit losses – that’s with 80% of members reporting thus far. While the results will get worse for the current quarter, these are not large declines.
When we exclude the financial sector, S&P 500 profits are up 16.5% thanks to six of the 10 major industry groups posting positive income results (four of which grew profits at rates faster than the long-term average).
This is good news and illustrates the compression that has occurred in equity multiples (P/Es) – as stocks have been clobbered even as most earnings have held up well -- that make an abundance of stocks cheaper than anytime in the past 15 years. But we mustn’t make policy mistakes or that earnings growth will wane for far longer than just the next couple of quarters. This is the risk. If Washington plays if smart, we can get through this situation in quick order. If they do not, then trouble will drag on for longer.
For sure the unusual duration of earnings growth will help U.S. companies get past this period. There has been just one quarter over the last 25 in which either overall S&P 500 operating earnings or ex-financial profits has failed to grow at double-digit rates. That is extraordinary and leaves corporations with huge cash positions to weather the earnings storm that is about to hit.
Have a great day!
Brent Vondera, Senior Analyst
The fact that four Senate seats remain undecided (and hence uncertainty continues over whether the Senate will have filibuster power or not) and the stimulus plans being discussed has not exactly inspired investors certainly didn’t help things. On this same note, as the market is eager to learn the make-up of the Obama economic team, the front runner for either Treasury Secretary or economic advisor is Larry Summers. This is someone who believes stimulus in the form of rebate checks and increased jobless benefits is the best thing since sliced bread, thus talk of the pick failed boost investor sentiment.
So, the market rallies one day and falters the next – the basic story continues.
The retreat halted an 18.5% rebound from the S&P 500’s five-year low reached on October 27 – a nearly uninterrupted snap-back over the previous six sessions.
Market Activity for November 5, 2008
Financial, consumer discretionary, basic materials and energy shares took the brunt of the damage – the same sectors that drove the rally the day prior. There is no way to rationalize this market, all you can do is invest in companies that are leaders in their respective industries, offer the most attractive valuations and diversify among asset classes. Oh, and of course, have patience.Economy
On the economic front, the ADP employment report fell 157,000 for October – a larger-than-expected decline by 50,000. This is a preliminary report the market looks to for clues on how the official Labor Department’s monthly jobs figure turns out. ADP is often a good degree off base regarding the amount of change but worth reporting nevertheless as it’s direction is typically accurate.
(Our feel is the level of job losses ADP is suggesting is relatively accurate this time – even as the official numbers will be worse)
The ADP report noted its October reading did not reflect the strike of some 27,000 Boeing machinists. The Labor Department’s October Strike Report did note 27,000 were on strike last month, so this will be reflected in Friday’s jobs report and thus if ADP is close to accurate we’ll get the 200,000 decline in payrolls we believe is likely.
In terms of job segments, ADP showed a 126,000 decline in goods-producing employment – manufacturing down 85,000 and construction down 45,000. Service-sector jobs declined 31,000 in October, according to ADP.
In a separate report, the ISM Non-Manufacturing Index (service-sector survey) showed activity contracted after spending the past eight months hovering around the line that demarks expansion from contraction. This index -- which equally weights the business activity, employment, new orders and supplier delivery indexes – fell to the lowest reading on record, falling to 44.4 for October after 50.2 in September. (The data only goes back to 1997, so keep in mind not a lot of history here)
For some perspective, the index spent 57 straight months (68% of this run in robust territory) in expansion mode prior to the weakening that occurred this year. Beginning in January 2008 the service sector began to deteriorate, although remained somewhat upbeat. Last month as the credit event began to take hold, the degree of weakness became evident as all other economic data sets have indicated – fourth-quarter GDP will post a negative reading. This decline in real GDP will not be a tepid one such as the downturn of 2001 but a decline that is in line with the typical recession, roughly -3.00% at an annual rate.
The index’s employment survey hit 41.2, also the lowest on record. This corroborates the ADP survey that Friday’s jobs report is going to show significant decline. If we do get a decline of something like 200,000 it shouldn’t come as a surprise after these reports and thus the market may take the news with a degree of equanimity.
We’ll also note that the job losses for the first nine months of the year have been mild relative to the normal labor-market contraction. Tomorrow’s October jobs report will show the slash and burn has begun as we should see a string of monthly losses of at least 150,000. For context, the 1990-1991 recession saw five months of monthly job losses that totaled at least 150,000 with a 300,000 loss thrown in the mix. Thus far the current labor-market downturn has posted just one reading of 150,000 as the average monthly decline has been mild at 84,000.
Earnings
I do like to offer some bright side after negative remarks like the statements above, and there is optimism to speak of as third-quarter earnings have come in much better than expected.
Overall S&P 500 operating earnings fell 10.5% in the third-quarter, largely due to financial-sector profit losses – that’s with 80% of members reporting thus far. While the results will get worse for the current quarter, these are not large declines.
When we exclude the financial sector, S&P 500 profits are up 16.5% thanks to six of the 10 major industry groups posting positive income results (four of which grew profits at rates faster than the long-term average).
This is good news and illustrates the compression that has occurred in equity multiples (P/Es) – as stocks have been clobbered even as most earnings have held up well -- that make an abundance of stocks cheaper than anytime in the past 15 years. But we mustn’t make policy mistakes or that earnings growth will wane for far longer than just the next couple of quarters. This is the risk. If Washington plays if smart, we can get through this situation in quick order. If they do not, then trouble will drag on for longer.
For sure the unusual duration of earnings growth will help U.S. companies get past this period. There has been just one quarter over the last 25 in which either overall S&P 500 operating earnings or ex-financial profits has failed to grow at double-digit rates. That is extraordinary and leaves corporations with huge cash positions to weather the earnings storm that is about to hit.
Have a great day!
Brent Vondera, Senior Analyst
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