LPL Economic & Market Commentary- 2011-11-07

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"Can the labor market JOLT the economy?" & "Kicking the Cannes"

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1.LP L FINANCIAL R E S E AR C HWeekly Economic CommentaryNovember 7, 2011Can The Labor Market JOLT the Economy?John Canally, CFA The upcoming week (November 7 11) is heavy on speakers from the FederalEconomist Reserve (Fed) and relatively light on U.S. economic reports, providing marketsLPL Financial ample time to reflect on the October employment report and to focus onthe deliberation of the congressional super-committee and the latest newsin Europe. The next round of Chinese economic data for October is due outHighlightsthis week, as the market continues to debate the hard landing/soft landingThis week is heavy on Federal Reserveissue in China. We will continue to watch the center of gravity at the speakers and light on U.S. economicFed Chairman Bernanke, Vice-Chair Yellen and New York Fed President data, as markets mull Europe and a fullDudley for any shift in tone. slate of Chinese economic reports.Aside from the regular weekly reports on retail sales and initial claims forThe JOLTS data, along with the October unemployment insurance, none of this weeks batch of economic data in employment report reveal that the laborthe United States is likely to be market moving. There are a number of Fed market continues to heal, but at anspeakers this week, as market participants mull over last weeks Federal excruciatingly slow pace.Open Market Committee (FOMC) meeting as well as the press conferenceheld by Fed Chairman Bernanke. This weeks speakers range from veryEconomic Calendar hawkish (Fed officials known to favor the low inflation side of the Feds dualmandate from Congress) to very dovish (Fed officials known to favor the full Monday, November 7 Thursday, November 10 employment side of the dual mandate). The hawks slated to speak this week Consumer CreditInitial Claimsare Philadelphia Fed President Charles Plosser and Minneapolis Fed President Sepwk 11/5Narayana Kocherlakota. The doves on the docket this week are San Francisco Tuesday, November 8Trade Balance Fed President John Williams, Chicago Fed President Charles Evans and Small Business Sentiment SepBoston Fed President Eric Rosengren. OctImport Price Index JOLTS Job Openings Oct It is likely that the hawks will say that the Fed is putting too much monetary SepTreasury Statementstimulus in the system, and equally as likely that the doves will say theOct Fed needs to do even more to support the economy. While the media will Wednesday, November 9 MBA Mortgage Friday, November 11 likely focus on the extremes, we will continue to watch the Feds center of Applications Index U of M Consumer gravity Bernanke, Yellen and Dudley for any shift in tone at the Fed. Two wk 11/4Sentiment of the three (Bernanke and Yellen) are set to make public appearances thisNov Wholesale Inventoriesweek. We continue to expect the Fed to pursue historically accommodative Sepmonetary policy in the period ahead. Even if the economy tracks to themarkets expectations (roughly 2.0% real gross domestic product growthin 2012 and 2.5% in 2013), the Fed is likely to ease even more in 2012 (viaadditional purchases of Treasury securities or mortgage-backed securitiesin the open market), as the Feds forecast for economic growth and theunemployment rate remains more optimistic than the markets. The nextFOMC meeting is in mid-December. Member FINRA/SIPCPage 1 of 42. W E E KLY E CONOMIC CO MME N TAR YIn our view, fears of a hard landing inThis weeks economic calendar is filled mainly with second-tier reports onChina (and related issues like Chinas the economy and with little in the way of corporate earnings news on tapbanking system and property market) arethis week, markets are likely to continue to focus on Europe, the super- committees deliberations on the federal budget and on the full docket ofwaiting in the wings to replace Europe Chinese economic reports for October.and the U.S. fiscal situation as thefinancial markets concern du jour.Unlike most developed markets (and most emerging markets), where the economic data calendar is set well in advance, the Chinese economic data calendar is relatively flexible. Reports on Chinese industrial production, retail sales, exports and imports, and perhaps money supply and new loans are likely to be released this week, as market participants continue to debate whether or not Chinese authorities can guide Chinas economy, the worlds second largest, to a soft landing. Although fears continue to swirl in the marketplace about a so-called hard landing a sharp and unwanted slowdown in economic growth in China to around 5 or 6% from the current growth rate around 9% our view remains that China can achieve soft- landing growth of 7 to 8%, and that Chinese authorities are close to taking1The Percent Of Job Quitters is Climbing, A Healthysteps to stimulate the Chinese economy. In our view, fears of a hard landing Sign for the Labor Market in China (and related issues like Chinas banking system and property market) Private Sector Job Quitters As aare waiting in the wings to replace Europe and the U.S. fiscal situation as the Percent of Total Separations 0.675 financial markets concern du jour. 0.600 The JOLTS Data and the Labor Market One report due out this week that we like to watch, but one the market 0.525 seems to ignore, is the job openings and labor turnover (JOLTS) report. The 0.450 JOLTS report does not get a lot of attention, mainly because it is dated (the report due this week is for September), and the market already has plenty 0.375 of information on the labor market in October. However, the JOLTS data 01 02 03 04 05 0607 08 09 10 11 provides more insight into the inner workings of the labor market than theSource: Haver Analytics 11/7/11monthly employment report does. JOLTS provides data on: The number of job openings (there were just over three million open jobs at the end of August) The number of new hires in a given month (four million positions were filled in August) Job separations (just under four million people left jobs in August) The data is conveniently broken down by industry group and by region as well. On the surface, the data reveals just how dynamic the U.S. labor market is, demonstrating how the economy creates (and destroys) tens of millions of jobs a year. Digging a little deeper, one of our favorite components of the JOLTS data can be found within the data on job separations. People are separated from their jobs either voluntarily (they retire or quit to take another job) or involuntarily (they are laid off or fired from their jobs). As noted above, just under four million positions were eliminated in August. About half of these (two million) came as a result of people leaving their current positions voluntarily. While not quite back to normal during theLPL Financial Member FINRA/SIPC Page 2 of 4 3. W E E KLY E CONOMIC CO MME N TAR YThe steady climb higher in recent months mid-2000s economic expansion in the United States, roughly 55% of jobof the number of job separations that areseparations were the result of workers voluntarily quitting their jobs thevoluntary suggests that the labor market percentage of job quitters in August was far above the recession lows. In early 2009, during the worst of the Great Recession, only 37% of separationsis healing, albeit slowly, as individuals are were voluntary, suggesting that layoffs and downsizing accounted for nearlybecoming more and more confident intwo-thirds of job separations. The steady climb higher in recent months of thethe labor market. After all, you would not number of job separations that are voluntary suggests that the labor market islikely leave a job in todays environmenthealing, albeit slowly, as individuals are becoming more and more confidentunless another job was waiting for you.in the labor market. After all, you would not likely leave a job in todays environment unless another job was waiting for you. As noted in last weeks employment report for October, the labor market is healing, but still has a long way to go. The data further undercuts the notion that the economy is in, or about to enter, a recession, although it does suggest only sluggish growth (2.0 to 2.5% GDP growth). The economy created 80,000 jobs in the month (expectations were for an increase of2 Job Creation In This Recovery Is In Line With the125,000), but the job count in the prior two months was revised up by aRecoveries From the 1990 91 and 2001 Recessionscombined 102,000, taking some of the sting out of the below-consensus October reading. The private sector created 104,000 jobs in October, as state20102003 and local governments shed another 22,000 jobs.1991 6%Over the past three months, the private sector has added an average of 122,000 jobs per month; good, but not great. The private sector economy 5% shed 8.8 million jobs between December 2007 and February 2010, but has 4%added just 2.8 million of those jobs back since then, creating jobs in each 3%of the past 20 months in the process. The increase in the number of private sector jobs over the past 20 months is in line with the pace of job creation 2% seen during recoveries from the last two recessions (1990 91 and 2001), as 1%seen in Chart 2. The payroll job count data is culled from a survey of 440,000 0%business establishments across the country.0 61218 24 30 36Source: LPL Financial, Bloomberg Data 11/4/11 The unemployment rate, calculated from a survey of 60,000 households across the country a huge sample size for a national survey given that most polling on national elections survey only a few thousand people at most dipped 0.1% to 9.0% in October. The unemployment rate is calculated by dividing the number of unemployed persons (about 14 million) by the total number of people at work or looking for work (about 154 million). The details of this household survey were solid, as the surveys count of employment increased by 277,000, the third consecutive sizeable gain (275,000+). The number of persons in the labor force (at work or looking for work) increased for the third consecutive month as well. On balance, the labor market remains stuck in neutral. The economy is growing just enough to produce some job growth, but not quickly enough to substantially lower the unemployment rate or the number of people filing for new unemployment benefits each week. In short, the economic and policy uncertainty that is restraining the rest of the economy is still clearly being felt in the labor market, and only a resolution of that uncertainty will lead to an improved labor market in the months and quarters ahead.LPL Financial Member FINRA/SIPC Page 3 of 4 4. W E E KLY E CONOMIC CO MME N TAR YIMPORTANT DISCLOSURESThe opinions voiced in this material are for general information only and are not intended to provide specificadvice or recommendations for any individual. To determine which investment(s) may be appropriate for you,consult your financial advisor prior to investing. All performance reference is historical and is no guarantee offuture results. All indices are unmanaged and cannot be invested into directly.Job Openings and Labor Turnover Survey (JOLTS) is a survey done by the United States Bureau of LaborStatistics to help measure job vacancies. It collects data from employers including retailers, manufacturers anddifferent offices each month. Respondents to the survey answer quantitative and qualitative questions abouttheir businesses employment, job openings, recruitment, hires and separations. The JOLTS data is publishedmonthly and by region and industry.This research material has been prepared by LPL Financial.The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is notan affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPCPage 4 of 4RES 3384 1111Tracking #1-021222 (Exp. 11/12) 5. LP L FINANCIAL R E S E AR C HWeekly Market Commentary November 7, 2011 Kicking the Cannes The S&P 500 Index had a bumpy ride last week as it tumbled 5% in theJeffrey Kleintop, CFAChief Market Strategist first two days on the eve of the Group of 20 summit in Cannes, France, asLPL Financialthe Greek Prime Minister proposed a referendum on the European debt deal. This political move risked scuttling the hard-fought deal that had been unveiled the prior week that contributed to the powerful stock market rally.Highlights Stocks recovered most of the lost ground later in the week as the PrimeStock market volatility was driven by last Minister withdrew his call for a referendum and moved toward establishingweeks political brinkmanship derailingplans to secure funding support from China a new government for Greece that is very likely to approve the controversialand other countries for the European debtdebt rescue package.rescue plan, kicking the implementation of However, the political brinkmanship derailed plans by the leaders of Germanythe plan down the road well past the G20meeting in Cannes. and France to showcase the new plan in order to secure funding support from China and other countries.The French President said it may take untilWith every move in the stock market seeming February 2012 for a funding deal to be reached, kicking the implementationto coincide with a headline coming out ofEurope, it would be easy to conclude that this of the plan down the road well past the meeting in Cannes.is the only issue that matters to investors. While hurdles to implementation of the debt plan are materializing, ItalysBy stepping back from the day-to-day and 10-year borrowing costs are slowly nearing the 7% threshold that forcedweek-to-week trading, it appears the issuesGreece, Ireland and Portugal to seek bailouts last year. The yield on Italys 10-in Europe over the past couple of years have year bond rose to 6.35%, the highest since the creation of the euro currencymerely created volatility around the true focusin January 1999. We expect the delay will force changes in the Italianof investors on the fundamental economic government and result in the passage of the difficult, but necessary reformsbackdrop that continues to slowly improve. to return to a sustainable fiscal path. With every move in the stock market seeming to coincide with a headline1Stock Market Tracking Economic, Rather Than coming out of Europe, it would be easy to conclude that this is the only European, Developments issue that matters to investors. By stepping back from the day-to-dayS&P 500 (Left Axis)and week-to-week trading, we can see a different, longer-term pattern ofInitial Jobless Claims in Thousands (Right Axis, Inverted)1700 performance emerging one that reflects a different focus entirely. 2251500 If we look back at the past five years, we can see that stocks have very 3251300 425 closely tracked real-time economic data, as measured by the weekly tally of1100 initial claims for unemployment benefits as seen in Chart 1. It appears the 525 issues in Europe over the past couple of years have merely created volatility 900 625 around the true focus of investors on the fundamental economic backdrop 700 725 that continues to slowly improve. 500 825 2007 2008 20092010 2011 What else does this chart tell us? That the October rally was justifiedSource: LPL Financial, Bloomberg data 11/04/11 based on the underlying economic fundamentals and that stocks may haveThe S&P 500 is an unmanaged index, which cannot be invested into additional modest gains in the months ahead barring distractions thatdirectly. Past performance is no guarantee of future results. Member FINRA/SIPC Page 1 of 2 6. W E E KLY MARKE T CO MME N TAR Ycause stocks to again deviate from the underlying driver. In fact, based onthis relationship, if initial jobless claims fall to a more normal level of 350,000by year-end 2012, the S&P 500 would be around 1400, well above Fridaysclosing level of 1253.Job growth does not make for a healthyThis would seem to suggest that what the market really cares about areeconomy; a healthy economy makesjobs. But we believe that would put too fine a point on it. Initial joblessjobs grow.claims do measure the conditions in the job market, but they are also areal-time, weekly reflection of economic conditions. While the President andGOP presidential candidates focus on promoting their job plans, we thinkit is important to keep in mind that job growth does not make for a healthyeconomy; a healthy economy makes jobs grow (see this weeks WeeklyEconomic Commentary for a look at the October employment report). Thehealth of the economy reflected in initial jobless claims is critical to gaugingthe outlook for the magnitude and sustainability of profit growth critical tolong-term stock market performance.IMPORTANT DISCLOSURESThe opinions voiced in this material are for general information only and are not intended to provide specificadvice or recommendations for any individual. To determine which investment(s) may be appropriate for you,consult your financial advisor prior to investing. All performance reference is historical and is no guarantee offuture results. All indices are unmanaged and cannot be invested into directly.The economic forecasts set forth in the presentation may not develop as predicted and there can be noguarantee that strategies promoted will be successful.The Group of Twenty (G-20) Finance Ministers and Central Bank Governors is the premier forum for ourinternational economic development that promotes open and constructive discussion between industrialand emerging-market countries on key issues related to global economic stability. By contributing to thestrengthening of the international financial architecture and providing opportunities for dialogue on nationalpolicies, international co-operation, and international financial institutions, the G-20 helps to support growthand development across the globe.The Standard & Poors 500 Index is a capitalization-weighted index of 500 stocks designed to measureperformance of the broad domestic economy through changes in the aggregate market value of 500 stocksrepresenting all major industries.International and emerging markets investing involves special risks such as currency fluctuation and politicalinstability and may not be suitable for all investors.This research material has been prepared by LPL Financial.The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is notan affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit Member FINRA/SIPCPage 2 of 2RES 3383 1111Tracking #1-021251 (Exp. 11/12)