My Friday column is divided into two sections. The first section breaks economic data down into long-leading, leading, and coincidental indicators – a methodology created by Arthur Burns and Geoffrey Moore. The second looks at the index ETFs, including SPY, QQQ, IJH, IWM, and IWC.
Long-Leading Indicators
Here is the data from the latest FactSet Earnings Insight (emphasis added):
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As of today, the S&P 500 is reporting a year-over-year decline in revenues of -2.1%, compared to a year-over-year decline in revenues of -3.0% last week and a year-over-year decline in earnings of -3.6% at the end of the third quarter. Positive revenue surprises reported by companies in multiple sectors (led by the Communication Services and Consumer Discretionary sectors) were responsible for the decrease in the overall revenue decline during the past week.
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The blended (year-over-year) earnings decline for the third quarter is -9.8%, which is smaller than the earnings decline of -16.6% last week. Positive surprises reported by companies in multiple sectors (led by the Communication Services and Consumer Discretionary sectors) were responsible for the large decrease in the overall earnings decline for the index during the week.
There is actually some good news in the above data. The first is the small magnitude of the Y/Y gross revenue decline. Considering the magnitude of the macroeconomic shock caused by lockdowns, a 2.1% drop in revenue is not bad. Secondly, the amount of the overall earnings decline is also decent, all things considered.
Still, expect companies to be very hesitant regarding hiring and capital investment through at least the end of the year and probably 2Q21.
Leading Indicators
This week there was no new information in this area, save for weekly hours worked by manufacturing workers…
…which inched higher this week.
Please reference last week’s column for the data.
Coincidental data
This week, the ISM released its latest manufacturing and service sector indexes. I prefer this data series to Markit Economics data.
The ISM Manufacturing Report was very strong. The PMI increased 3.9 points to 59.3; new orders rose a robust 7.7 points to 67.9; and production was up 2 points to 63. The anecdotal data was also very strong (emphasis added):
- “COVID-19 continues to have an effect on supplier support and operations, more from a decreased labor perspective rather than unavailable material.” (Computer & Electronic Products)
- “Business continues to be robust. Sales are greater than expectations, and cost pressures are modest. There is posturing by suppliers on market price increases for corrugated and polypropylene, yet no firm price increases at this time. We expect a strong finish to 2020 and a solid start in 2021.” (Chemical Products)
- “Sales continue to be strong – up 4 percent this September compared to September 2019. The year-to-date level is still 21 percent below last year due to the [COVID-19] shutdown, but sales are stronger than expected and forecast to stay strong through the first quarter of 2021.” (Transportation Equipment)
- “Increased production due to stores stocking up for the second wave of COVID-19.” (Food, Beverage & Tobacco Products)
- “Continue to see increases in customer demand. We still are not back to pre-COVID-19 levels but are continually improving.” (Fabricated Metal Products)
- “Construction materials have leveled off but continue to be at an all-time high. Mills for board sheet stock have pushed out lead times citing increasing backlogs related to the pandemic and increased supply in the housing market.” (Furniture & Related Products)
- “Business is almost back to normal levels; however, customers are still cautious with capital spending.” (Machinery)
- “Business levels have just about returned to pre-COVID-19 levels. Our company is remaining conservative with fixed-cost spending, knowing the uncertainties that lie ahead with COVID-19 and its potential impact globally.” (Miscellaneous Manufacturing)
- “October order books are the strongest we have seen in the past six months.” (Paper Products)
- “We continue to see stronger month-over-month orders in plastic injection molding.” (Plastics & Rubber Products)
Here’s a long-term chart of the data from Advisor Perspectives:
The ISM service index declined 1.2 to a still healthy 56.6. New orders were down 2.7 points to 58.8 while production was off 1.8 to a still very solid 61.2. Despite the strong numbers, the anecdotal comments were more mixed:
- “Business has improved, but greatly reliant on COVID-19-related restrictions. Supplier’s inventories and lead times are longer and spotty with outages due to keeping lead times lean as a cash flow measure, but putting consistent supply at risk.” (Accommodation & Food Services)
- “Interesting business cycle: Labor is still in short supply, and work orders are picking up.” (Construction)
- “Challenges to maintain safety and prevent the spread of COVID-19 has meant changes in the way activities are carried out. Purchases of personal protective equipment (PPE) and facilities equipment along with modifications to buildings and walkways has led to higher spending in some areas.” (Educational Services)
- “Given COVID-19, the adjustments we have made across the company has allowed us to reach previous employment levels, and those furloughed are back to work. Everyone is careful to wear the required PPE and keep distancing. We have added additional cleaning staff between shifts to upgrade sanitation.” (Finance & Insurance)
- “The new normal COVID-19 environment is causing uncertainty, but we’ve seen an increase in business that is close to pre-COVID-19 volumes for procedures.” (Health Care & Social Assistance)
- “While the economy is getting better, there is still very much uncertainty about the future. We are putting capital expenditures on hold until we gain additional confidence and certainty.” (Information)
- “We are remaining cautiously positive and resuming normal business operations.” (Management of Companies & Support Services)
- “Encouraging signs continue for an improved fourth quarter.” (Professional, Scientific & Technical Services)
- “We continue to be cautiously optimistic that the rebound in business that began in July continues to sustain.” (Retail Trade)
- “Business continues to gain as people are travelling and businesses are opening up to consumers.” (Wholesale Trade)
Most of the comments include some type of hedge usually relating to future activity.
Here’s a chart of the data from Advisor Perspectives:
Today, the BLS released the latest employment report. Before looking at the headline data, let’s dig into some key numbers from the Household report.
The labor force participation rate (left) is still about half-way down from its pre-lockdown level. But it did increase in the latest report, which is positive. The employment/population ratio (right) continues to increase. Let’s place this data into a longer-term perspective:
Both statistics are still down by fairly hefty levels.
The U6 unemployment rate (in red) has declined 10.7% from 22.8 to 14.7%. The U3 rate dropped from 14.7% to 6.9% for a total drop of 7.8%.
Now, let’s take a look at the establishment data.
Total pandemic job losses were 22,160,000. So far, the economy has regained 12,070,000 of those losses, or about 55%.
Economic data conclusion: Most of the data is good. The hard data continues to point towards economic growth. Financial markets have rebounded, and the credit markets are liquid. The biggest problem is the labor market. While unemployment has dropped, the decline is due as much to people leaving the labor force as jobs being created.
Let’s take a look at this week’s performance tables:
This was a great week for the markets. The large-cap indexes had very strong gains with QQQ up 9.3%, OEF gaining 7.45%, and SPY rallying 7.17%. Smaller-caps also had solid moves up.
First, note that three defensive sectors (consumer staples, utilities, and real estate) are all near the bottom of the list. Tech had a very strong week, which explains why QQQ was the top-performing index.
There’s a lot of contradictory information in the index and sector charts that I’ll sort through in my weekly ETF investor and trader, which will be out on Monday morning. For now, let’s just focus on this week’s charts, which were great:
SPY five-day
I think of these charts as “stair-steps” where a security will gap higher at the open and then spend the rest of the session consolidating gains. On Thursday and Friday, prices trended sideways, more or less consolidating the week’s gains.
QQQ five-day
QQQ has a similar pattern.
Probably the best news is that despite the rather noisy news background this week, the markets rallied strongly.
Have a good weekend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
