Yesterday I mentioned rail traffic and temp employment and how they both were indicating a strengthening labor market and economy. Today “Davidson” expounds on that with today’s data.
The basis of my investment advice is the perspective of past business cycles, how the data develops “data point by data point” to form economic trends and finally how these trends become reflected in market prices. The fundamental concept is simple, but compiling the data and doing the analysis is the bulk of the work. The perspective is an investment history of hundreds of years, but the up-cycle can vary from a few years to longer than 10yrs. The goal is to capture a significant part of the investment up-cycles as long term capital gains and avoid the down-cycles. Importantly: Economic data develops over years. It creeps along! One cannot trade it, but I believe it to be very investible if one has patience and a comparable timeframe.
The employment reports this morning were actually in line with previous trends. The Establishment Survey was not only higher by 204,000 but September was revised higher by 15,000 moving from an earlier reported gain of 148,000 to a revised gain of 163,000 and August was revised higher by 45,000 from a first reported 193,000. The drop in the Household Survey of -735,000 is the impact from the government shutdown which was not apparent in the other indicators which I monitor. I expect the Household to reverse this loss in the next report because all other indicators remain in established up-trends. The Light Weight Vehicle sales were officially reported at 15.154mil SAAR(Seasonally Adjusted Annual Rate) down slightly from the earlier estimate of 15.45mil SAAR. Vehicle sales which are one of the best economic and stock market indicators and remain at levels correlated with strong economic growth.
Earlier this week it was nice to see Real GDP reported at a surprise 2.8%. This measure will be revised in the next 6mos, but the reported level agrees with what we have been seeing all along in multiple economic measures. The reason why Real GDP has appeared weak the past 4yrs is primarily due to the decline in government employment and spending which has been subtracting from private business Real GDP which has been rising at decent levels. It is private businesses which are the true growth engine of our economy and when they are operating reasonably well they cures the many ills which come from government-sponsored financial excess. I remain VERY OPTIMISTIC on the private economy to fully rebound. It is hard to say this loud enough! As a country, we have always been very resilient economically. Currently all the signs indicate (where one takes the time to look) that we are as resilient as ever.
In the months ahead we should expect the Household Survey to quickly reverse the shutdown losses and for the Establishment Survey to continue its expansion. Retail Sales, Durable Goods Orders, Temp Hiring and etc each remain in positive growth tracks.
The Truth Behind Higher Interest Rates:
In the months ahead we actually need higher interest rates to justify a more robust economy. Higher interest rates at this stage of the economy mean that money is being moved from the safety of Treasuries to investments with higher expected returns. This is the climate which makes mtg lending more robust. Higher long term rates provides lending institutions with wider spreads for higher profits and most importantly lets them build stronger reserves to cover the routine level of mtg defaults which occur even during periods of economic expansion.
Higher rates should be welcomed!
Higher rates are the stuff of higher stock markets at this point in the cycle!
Optimism is warranted in my opinion. The economy is shifting to a higher gear and momentum is entering the market place