Kristina Hooper, CFP®, CIMA® is head of portfolio strategies for Allianz Global Investors Distributors LLC. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The majority of last week’s economic data positively surprised market observers—primarily the unemployment rate, which dropped to 7.8% in September from 8.1% in August as total employment rose by 873,000.
Of course, many market watchers had difficulty understanding how the unemployment rate, which admittedly is volatile and subject to significant reversals, could have improved so much so quickly. Yet it’s not so surprising when you consider that the number of people with part-time jobs who wanted to work full time—termed “involuntary part-time workers”—increased by 600,000 in September, to 8.6 million. These part-time jobs and other lower-quality positions could arguably be responsible for much of the improvement in the unemployment rate, since the Bureau of Labor Statistics has a fairly broad definition of employment.
While the unemployment rate showed dramatic improvement, we didn’t see the same from nonfarm payrolls, which are typically less volatile and more predictable than the unemployment rate. Nonfarm payrolls grew by only 114,000 in September, in line with expectations, but the good news is the upward revision in the July and August numbers—to 181,000 from 141,000 and to 142,000 from 96,000, respectively. We believe these results in total show that the labor market has normalized after a deterioration over the summer.
A more positive development was the September ISM Manufacturing Index’s move back into expansion mode after several months in contraction, rising to 51.5 versus consensus expectations of slightly under 50. In particular, the new orders index rose 5.2 points in September to 52.3, after three months of contraction. What’s more, the manufacturing employment index for September rose to 54.7, up 3.1 points from the August reading, in sync with jobs improvement. In addition, we saw a drop in the inventories series, implying that manufacturers have adjusted stock levels to a new lower run-rate to allow for slower global growth. This improvement in the ISM Manufacturing Index complements the nice increase in the September ISM Non-Manufacturing Index, which rose to 55.1 and included an increase in the new orders index, which climbed to 57.7 from August's 53.7 reading. However, one area of disappointment was a decrease in the employment index, which declined to 51.1 from 53.8 in August.
Adding to the positive news, consumer credit saw a big increase in August, rising $18.1 billion, far exceeding expectations. The majority of the jump came from a 9% increase non-revolving debt—in other words, “personal cap ex” items such as autos and student loans. U.S. consumers had $1.870 trillion in such debt outstanding. Revolving-credit borrowing, which includes credit card and line-of-credit balances, also increased, rising 5.90% in August to $854.9 billion, reversing the previous month's decline. The lower cost of servicing this debt is also improving: The average interest rate on credit cards is currently 11.95% versus 13.30% in 2007, while the interest rate on a 48-month new car loan is 4.88% versus 7.77% in 2007. This credit expansion is in line with the big increase in the consumer confidence number we saw the previous week, when September Consumer Confidence clocked in at 70.3, far higher than expectations.
But all is certainly not positive. August factory orders were very disappointing, falling 5.2%, and construction spending dropped as well. Crude oil is down but prices at the pump are high, which is putting a squeeze on consumers. And, of course, investors still fear the fiscal cliff, a slowdown in China, the euro-zone crisis and the potential for a disappointing third-quarter earnings season, which does not seem to be priced in. Many of these factors also concerned the Federal Open Market Committee during its September meeting, as indicated by its minutes released this week.
Still, since the preponderance of economic data was positive, it’s not surprising that stocks rose. In fact, the Dow gained 1.4%, finishing last week at 13,610.15. It is now within striking distance of its peak of 14,164 five years ago, on October 9, 2007, and far above its September 2008 level, right before the Lehman collapse and before the beginning of the financial and market crises.
Clearly, investors with longer time horizons who fled stocks in 2008 did themselves a disservice while those who maintained their equity exposure through the volatility of the few years have benefited, especially when factoring in dividend payments. The Dow’s journey over the last few years is not only an incredible recovery story, but should also serve as a reminder of the importance of maintaining adequate long-term exposure to equities. This is especially relevant now, as we attempt to realize our investment goals in an environment of financial repression.
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