U.S. stocks shook off the worst monthly jobs report in 34 years, boosted by financial shares (namely insurance stocks) after a forecast from Hartford Financial was far better than estimated. Also, traders and investors may have figured the significant level of job losses over the past three months may be signaling the worst monthly declines have been seen. (Not saying this with a lot of confidence, but even when we view the rough 1974 and 1981-82 recessions, one can see after three months of 320K-533K in payroll cuts the declines become milder.
Stocks began the session a little more than 3% to the downside, but reversed course as we entered the afternoon session to rally 7% from the day’s nadir.
As mentioned, financials led the advance; the shares – as measured by the S&P 500 index that tracks the sector -- jumped 8.63%. Technology and consumer discretionary shares also outperformed the broad-market, adding 3.91% and 3.67%, respectively.
We were a bit surprised to see industrial shares lag most sectors, as a massive stimulus package (centered on infrastructure projects) will benefit the group, but these shares have enjoyed a nice run over the past couple of weeks so it was probably just a function of money moving to financials and tech shares.
Market Activity for December 5, 2008
The Economy
Wow, so much for estimates!
The Labor Department reported non-farm payrolls declined 533,000 in November, blowing past the 335,000 decline expected. The unemployment rates fell less than estimated, coming in at 6.7% vs. the 6.8% expected – the figure was lower as 398,000 people removed themselves from the labor pool. The bright side is average hourly wages rose 0.4% and on a year-over-year basis accelerated to 3.7%. With energy prices falling like a rock, this means real wages have moved positive again – the growth in real wages came to halt a few months back as fuel prices jumped 65% in a five-month span prior to the current plunge.
Job losses within the goods-producing sectors (construction, manufacturing and computers/electronics) helped to push the payrolls figure lower, as has been the case for nearly a year now, but it was a collapse in service-sector jobs (namely retail, trade and transportation) that made the difference last month; the 533,000 decline in payrolls was the worst reading since December 1974. The service sector shed a massive 370,000 positions last month.
Education, health-care and government jobs remain the only areas of increase. Health-care remains pretty strong, picking up another 43,000 jobs in November and 408,000 year-to-date.
The unemployment rate rose to 6.7% in November from 6.5% for October. The increase would have been larger but labor-force participation dropped 0.3% to 65.8%. The number of people who want a job but quit looking for one in the past four weeks (want is known as “discouraged workers”) rose 398,000.
The jobless rate has jumped from the historically low level of 4.7% just 12 months ago. Although, that low jobless rate was likely a bit artificial –the over-investment within the housing market pushed the unemployment rate below 5.0%. The construction job losses, as the housing bubble popped, had not begun to show up until early this year. Still, even adjusting for this, to see the jobless rates jump nearly two-percentage points this fast is disturbing.
This report suggests the fourth-quarter GDP reading may drop in real terms by more than 5% at an annual rate. This would put the recession on par with the nasty 1981-82 recession. The large downward revisions to the previous two months’ worth of data (showing jobs losses were 199,000 more than previously estimated) show the credit-market chaos that began in September had more effect that previously thought.
That said, with these revisions we now see payrolls declined 403,000 for September, 320,000 for October and this November reading of 533,000. Even the harsh recessions of 1974 and 1981-82 showed declines of this magnitude proved the worst was over. This may prove true this time, one can’t know at this point. We’re going to see payrolls declines for several months still at least, but the worst may already have been witnessed.
The goods news was that average hourly wages rose a healthy 0.4% in November – double the expectation – and accelerated to 3.7% on a year-over-year basis. This is helpful.
This degree of labor market deterioration shows the bold changes in tax rates we discussed on Friday is very much needed. We acknowledge the likelihood of this occurring in the next Congress is remote. Ok, it’s a big fat dream.
But eventually this will occur and that’s when the economy will be put on a footing that will drive profits, job and income growth longer-term. (It has been just over a year since we ended the record double-digit profit growth streak – 20 consecutive quarters. We can do it again but it won’t occur via spending, it will take higher after-tax returns on capital, corporate and labor income.
For now what we’ll get is Keynesian-style approaches like publicly funded infrastructure projects.
Mortgage Stats
Mortgage delinquencies rose to a post-WWII high to hit 6.99% -- this is for the third quarter. Delinquencies measure mortgages that are 30 days past due. Mortgages that are seriously delinquent – 90 days past due and headed for foreclosure – rose from 4.50% to 5.17%.
As the next two charts show, the bulk of the damage is in the sub-prime market.
You’re about to be Stimulated
In a YouTube address on Saturday, the President-elect outlined his stimulus plan, which will focus on energy, road and bridges, schools, broadband and electronic health records -- the energy part of the plan was strangely vague.
The program will probably grow in size, possibly approaching a figure close to $1 trillion now that we’ve received very weak jobs numbers the past three months. The issue with these types of stimulus is that history has shown they just don’t have staying power. No doubt, you throw $700 billion - $1 trillion to infrastructure projects, among other things, GDP will get a boost over the next year. Problem is such programs lack incentives and activity generally fizzles out as a result. This is why a bold and substantial tax-rate response would be preferred, but such spending can still juice stocks and the economy over the short term.
The big concern is when we look back 18 months from now and find the budget deficit has grown by a multiple of four, you know what comes next – proposals to raise tax rates.
This would be exactly the wrong thing to do as the Fed will be in the process of removing the massive levels of liquidity they have pumped into the system. You slash tax rates when the Fed is fighting a significant inflationary event, which will be the case a year to 18 months out. This prescription worked masterfully in 1982 and if we ignore that lesson we’ll regret it. An environment of higher tax rates and much tighter monetary policy is not conducive to growth, to say the least.
Have a great day!
Brent Vondera, Senior Analyst
Stocks began the session a little more than 3% to the downside, but reversed course as we entered the afternoon session to rally 7% from the day’s nadir.
As mentioned, financials led the advance; the shares – as measured by the S&P 500 index that tracks the sector -- jumped 8.63%. Technology and consumer discretionary shares also outperformed the broad-market, adding 3.91% and 3.67%, respectively.
We were a bit surprised to see industrial shares lag most sectors, as a massive stimulus package (centered on infrastructure projects) will benefit the group, but these shares have enjoyed a nice run over the past couple of weeks so it was probably just a function of money moving to financials and tech shares.
Market Activity for December 5, 2008
The Economy
Wow, so much for estimates!
The Labor Department reported non-farm payrolls declined 533,000 in November, blowing past the 335,000 decline expected. The unemployment rates fell less than estimated, coming in at 6.7% vs. the 6.8% expected – the figure was lower as 398,000 people removed themselves from the labor pool. The bright side is average hourly wages rose 0.4% and on a year-over-year basis accelerated to 3.7%. With energy prices falling like a rock, this means real wages have moved positive again – the growth in real wages came to halt a few months back as fuel prices jumped 65% in a five-month span prior to the current plunge.
Job losses within the goods-producing sectors (construction, manufacturing and computers/electronics) helped to push the payrolls figure lower, as has been the case for nearly a year now, but it was a collapse in service-sector jobs (namely retail, trade and transportation) that made the difference last month; the 533,000 decline in payrolls was the worst reading since December 1974. The service sector shed a massive 370,000 positions last month.
Education, health-care and government jobs remain the only areas of increase. Health-care remains pretty strong, picking up another 43,000 jobs in November and 408,000 year-to-date.
The unemployment rate rose to 6.7% in November from 6.5% for October. The increase would have been larger but labor-force participation dropped 0.3% to 65.8%. The number of people who want a job but quit looking for one in the past four weeks (want is known as “discouraged workers”) rose 398,000.
The jobless rate has jumped from the historically low level of 4.7% just 12 months ago. Although, that low jobless rate was likely a bit artificial –the over-investment within the housing market pushed the unemployment rate below 5.0%. The construction job losses, as the housing bubble popped, had not begun to show up until early this year. Still, even adjusting for this, to see the jobless rates jump nearly two-percentage points this fast is disturbing.
This report suggests the fourth-quarter GDP reading may drop in real terms by more than 5% at an annual rate. This would put the recession on par with the nasty 1981-82 recession. The large downward revisions to the previous two months’ worth of data (showing jobs losses were 199,000 more than previously estimated) show the credit-market chaos that began in September had more effect that previously thought.
That said, with these revisions we now see payrolls declined 403,000 for September, 320,000 for October and this November reading of 533,000. Even the harsh recessions of 1974 and 1981-82 showed declines of this magnitude proved the worst was over. This may prove true this time, one can’t know at this point. We’re going to see payrolls declines for several months still at least, but the worst may already have been witnessed.
The goods news was that average hourly wages rose a healthy 0.4% in November – double the expectation – and accelerated to 3.7% on a year-over-year basis. This is helpful.
This degree of labor market deterioration shows the bold changes in tax rates we discussed on Friday is very much needed. We acknowledge the likelihood of this occurring in the next Congress is remote. Ok, it’s a big fat dream.
But eventually this will occur and that’s when the economy will be put on a footing that will drive profits, job and income growth longer-term. (It has been just over a year since we ended the record double-digit profit growth streak – 20 consecutive quarters. We can do it again but it won’t occur via spending, it will take higher after-tax returns on capital, corporate and labor income.
For now what we’ll get is Keynesian-style approaches like publicly funded infrastructure projects.
Mortgage Stats
Mortgage delinquencies rose to a post-WWII high to hit 6.99% -- this is for the third quarter. Delinquencies measure mortgages that are 30 days past due. Mortgages that are seriously delinquent – 90 days past due and headed for foreclosure – rose from 4.50% to 5.17%.
As the next two charts show, the bulk of the damage is in the sub-prime market.
You’re about to be Stimulated
In a YouTube address on Saturday, the President-elect outlined his stimulus plan, which will focus on energy, road and bridges, schools, broadband and electronic health records -- the energy part of the plan was strangely vague.
The program will probably grow in size, possibly approaching a figure close to $1 trillion now that we’ve received very weak jobs numbers the past three months. The issue with these types of stimulus is that history has shown they just don’t have staying power. No doubt, you throw $700 billion - $1 trillion to infrastructure projects, among other things, GDP will get a boost over the next year. Problem is such programs lack incentives and activity generally fizzles out as a result. This is why a bold and substantial tax-rate response would be preferred, but such spending can still juice stocks and the economy over the short term.
The big concern is when we look back 18 months from now and find the budget deficit has grown by a multiple of four, you know what comes next – proposals to raise tax rates.
This would be exactly the wrong thing to do as the Fed will be in the process of removing the massive levels of liquidity they have pumped into the system. You slash tax rates when the Fed is fighting a significant inflationary event, which will be the case a year to 18 months out. This prescription worked masterfully in 1982 and if we ignore that lesson we’ll regret it. An environment of higher tax rates and much tighter monetary policy is not conducive to growth, to say the least.
Have a great day!
Brent Vondera, Senior Analyst
No comments:
Post a Comment