Did you know that the S&P 500 index notched an all-time high each day the last week of June? It’s been nearly two months since the Dow Jones Industrial Average reached new heights of its own. Driving the (admittedly slim) difference in performance between the two well-known benchmarks is the reemergence of tech stocks as market leaders. On the back of a court win, Facebook’s stock became the latest to cross above the $1 trillion market-cap threshold, joining Microsoft and fellow FAANGs Apple, Amazon and Google parent Alphabet in that rarefied group.
But it was jobs news that really held traders’ attention, with consistently positive data helping keep the equity markets trending up. Friday’s non-farm payrolls report exceeded economists’ expectations, setting up a strong close to the week. According to the Labor Department, the U.S. added 850,000 jobs in June (far more than consensus estimates of 706,000).
The jobless rate ticked higher, to 5.9%, but that may actually be a sign of strength, as more people voluntarily left their jobs (which typically only happens when workers are confident, they can find a better-paying job). That said, there’s still room to grow—even as folks reenter the workforce and hunt for employment, the economy has 6.8 million fewer jobs (a number that’s shrunk significantly in recent months) than pre-pandemic.
Put it all together, and there’s still no sign of the rally slowing down. At the midpoint of 2021, the Dow Jones Industrial Average is up 14.2% for the year through Thursday, June 30th, while the broader S&P 500 has gained 15.9% on a total return basis. The MSCI EAFE index, a measure of developed international stock markets, has returned 9.0%. The Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.52%, up from 1.12% at the end of 2020. Overall, the U.S. bond market has declined 1.6% year-to-date.
Highlights
In past letters I have used charts containing economic data to highlight where we were in the economic cycle and why we positioned the portfolios in the way that we did. In this letter I wanted to go through some of these same charts to show where we are in the economic cycle now and how long this bull market might continue. We are currently in the midst of an economic recovery. But we are no longer at the very beginning stages of this recovery. In many ways we are farther along than many might think.
One chart I have often used to gauge where we are in the economic recovery is the chart showing unemployment claims. My argument has always been that at the end of an economic cycle when unemployment gets too low, there is no more available labor to continue growth in GDP and that is when the equity market becomes vulnerable. Currently we are neither at the end of the cycle or at the very beginning. Instead, if you are looking only at unemployment claims, we are at the same point we were at in 2012-13.
So even though we are a little more than a year into this economic cycle, if you were to gauge the economic recovery in terms of unemployment claims, we are much farther into the economic recovery than many might think. That conclusion is also consistent with this chart which shows the number of new single-family homes for sale. During the last economic cycle, we reached a bottom in August 2012. At present, we seem to have already reached a bottom and have begun to turn up.
The tenor of these data is well worth monitoring. When we should become wary is when we get up to the 400,000 area of new single family home sales. In past eras when we exceeded 400,000 single family homes for sale, we have generally peaked as an economy. We are at least a couple of years from that level now. And as it now stands there is a lack of housing in many areas of the US, so we can probably stand to go higher than 400,000 new units per year.
Here is another chart showing we are farther along in recovery than many may believe. Currently the number of heavy weight trucks being sold is what you would typically see in a mid to late cycle.
This last chart in particular does not mean we are fated to go into recession anytime soon but it does mean, many parts of the economy are very healthy and are well advanced into their recovery.
However, there are also data that run counter to the idea that the recovery is very far along. The growth of bank loans took a slight dip recently, during which time it moved from positive to negative territory.
Note the loan growth in other expansionary periods. It is consistently positive for many consecutive years. We would want to see consistent positive loan growth for a prolonged period to say the recovery is on a sustaining path. And we probably aren’t there yet in the banking sector.
Conclusion
This bull market may not last as long as the last one. The main issue is that when compared to the financial crisis in 2008, this time around the Fed didn’t allow the downturn to endure that long and become as severe. As a result, the current economic recovery doesn’t require as long a runway to reach full capacity again. That shortened time period also leaves a shorter runway for equities to continue to gain value. Having such a great year in equities last year, it makes sense that there could be a period of sideways action before another leg higher.
This does not mean conditions have become unfavorable for stocks. Conditions remain very good. Just keep in mind that investing in stocks and bonds is a long-term endeavor.