Today, yet another “unexpected” increase in initial state unemployment claism occurred. When you look at the top chart the Calculated Risk keeps (LINK), you see that the pace of decline coming off the spike peak in claims in early 2009 has continued to moderate, and it appears as though a clear uptrend has just begun (for how long, only the future will tell, of course).
The ECRI team focused heavily on employment trends recently. In a Bloomberg TV interview on May 9 (LINK), ECRI’s head man, Lakshman Achuthan, reiterated his recession call and indicated that the missing piece of the puzzle from his cyclical forecasting standpoint had been jobs growth, which he said had now begun to turn negative. This month’s Labor Dept. employment report and the ongoing uptrend in initial unemployment claims supports his view.
From a market standpoint, standard valuation metrics that focus on forward P/E’s and that focus on comparisons of stocks to bonds/cash show the stock market to be relatively undervalued. So these metrics bring in a lot of buying pressure. The reality, though, may prove to be that future P/E’s are way off. Given that there is no sign that I am aware of that the macroeconomy in the world’s largest economic bloc, the European Union, is at a positive second derivative point of deterioration of economies there. The weak U.S. economic expansion may simply be pushed to contraction from an ill wind blowing across the Atlantic from Europe.
The modest drop in today’s preliminary May CPI data continue to be consistent with the theme that producers, guided by their own economists, have misjudged the lack of real buying power in the U.S. and global economy, and are finally being forced to cut the prices they have jacked up with alacrity once they saw central banks fire their bazookas beginning late in 2008.
Finally, in a non-headline data point, Gallup’s daily polling of “discretionary” daily consumer spending has been dropping. I use the longer-term, 14-day average. Self-reported daily spending is now at the levels of both 2011 and 2010. Because it is not adjusted for “inflation”, it suggests that the recession never ended for most people.
All the above points suggest that there are valid underlying reasons why the interest rate structure of the United States and much of the developed world has been in a downtrend for the last two or more years. From a markets standpoint, the price increase (yield decrease) in the electric utilities during the past two weeks, when Treasury yields have risen, also suggests to me that this trend is continuing and that market participants have decided that the traditional relationships between Treasury yields and bond-like utility dividend yields should be re-established. The ‘New Normal’ here could point to yet lower utility yields and thus higher stock prices in this sector. If this occurs, it would turn “GARP” investing on its head, but stranger things have happened.