As we get further into fall — a period that people consider particularly worrisome for markets as ghosts of the crash of ’87, the Asian financial crisis of ’97 and Lehman Brothers come back to haunt investors’ memories — it becomes easy to lose sight of the factors that brought markets this far. That loss of clarity is compounded by natural disasters such as hurricanes Harvey and Irma and man-made threats such as Kim Jong Un and terrorism. Yet, even with all these negative situations, stocks have continued to climb their proverbial wall of worry as the S&P 500 just finished at a weekly all-time high of 2502. So as markets sit at highs and pundits continue to pitch fear and the “late cycle” narrative, the data tell a different story.
The first piece of data up for discussion, and something that is a pillar of all economic expansions and bull markets, is employment. While many different metrics exist for gauging the health of the labor market, the initial claims series is the most useful one, with its hard data basis and near real-time frequency. Unemployment claims data are an excellent gauge of changes in highly cyclical industries because claims are often a lifeline for many workers when a job ends. Looking at the long-term history of claims and assuming that the economy has reached most economists’ nirvana of “full employment” at various times since 1980, it’s safe to say that the labor market is indeed healthy.
Then, looking at what claims could do as we move forward, we can look at the data in the context of job openings to see a relationship that looks set to drive claims data even lower.
Having job openings at an all-time high certainly bodes well for future labor market health.
With a solid employment situation in place, the focus shifts to business activity. Healthy and sustainable business activity is the key to keeping employment high and the economic expansion in place. That said, just last week we got several key data points that showed business activity progressing quite well.
On Thursday, we got the highly regarded Philadelphia Fed manufacturing survey that saw nearly all of its components move up in September. The Philly Fed survey and its other regional brethren provide a valuable and informed view of local economic situations around the country. September’s survey, which includes responses up to Sept. 18, saw a marked rise in new orders, shipments and prices paid/received. The new orders component, which hit 29.5 in September versus its 2017 and lifetime averages of 25.9 and 9.4, respectively, is showing significant strength.
With new orders in a solid position, there would need to be a significant and prolonged downturn before even entertaining the notion of a recession.
Complementing the Philly Fed data was the New York Fed’s Empire State Manufacturing survey, which also showed healthy activity for September. The survey, which includes most data collected up until Sept. 10, saw both its general business and new orders components come in at near-cycle highs.
The report also saw upticks in its employment and prices components, which helped drive those series toward cycle highs as well. We’ll get a look at more regional data this week when the Dallas, Richmond and Kansas City Fed branches all publish their reports.
On Friday, we got a look at manufacturing and services data in the Markit Flash reports for the eurozone and the U.S. In the European data, we couldn’t have gotten a more bullish report. The manufacturing PMI came in at 58.2, near a seven-year high, while the services component came in at 55.6, up slightly from August. Highlighting the overall strength of the Markit data were gains in its new orders and employment components. The report also cited significant employment gains and increased business confidence for the area. All in all, the report shows a level of activity such that the European economic situation no longer should be described as in a recovery, but more as recovered.
In the U.S. report, data also showed healthy levels of activity in manufacturing and services, with the services side resuming its leading role. The services sector saw healthy gains in new orders and employment while manufacturing was a bit subdued in comparison. Corroborating the rising prices seen in the regional Fed data, the Markit report cited the composite (both manufacturing and services) having its highest cost levels since June 2015, with manufacturing input prices hitting their highest levels since December 2012. Given the significant gains seen in manufacturing activity since late 2016, it’s understandable to see a slight deceleration now. The main takeaway here is that growth and a healthy level of business activity are occurring in the most important and largest sector of the economy, services.
All the above data have contributed to companies being able to generate the strong economic activity and earnings needed to get markets to these levels. All these positive economic events are now helping to drive third-quarter earnings and sales estimates higher as FactSet puts forth in its September Insight report. Looking at the market from a historical valuation perspective, we can see that on the basis of an earnings multiple we are not in uncharted territory.
Indeed, if we were to see current S&P third- and fourth-quarter earnings estimates realized at today’s multiple, the S&P would finish the year at 2743, making for a very happy ending to this year’s market story.