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Sandy Devastates the East Coast – Job Market Continues to Improve

Inside we update you on this week's market activity, including Sandy's impact and comment on the strengthening job and real estate markets. See how this effects you.

Hurricane Sandy Creates Havoc Throughout the USA 

To state the obvious, the event creating the greatest impact this past week was Hurricane Sandy.  Much of the eastern section of the USA is dealing with Sandy’s aftermath and this will continue for days and weeks to come.  Power for hundreds of thousands of people will not be restored until the end of next week.  In New Jersey, some gas lines were almost a mile long. Initial estimates of Sandy’s damage are running at $50 billion in losses. The human toll is much greater.

Sandy’s impact was also felt by the USA stock exchanges. The New York Stock exchange closed for Monday and Tuesday. How unusual was this closure of the New York Stock Exchange? You have to go back to 1888 which was the last time the New York Stock Exchange was closed for two days because of weather.

When the stock exchange opened on Wednesday, the markets rallied for about a 1% gain. However, by the end of the week, the markets had given up most of Wednesday gains.  For the week ending November 2nd  – the S&P 500 closed at 1,414 – a gain of 3 points for the week. 

In The Photo Section is a chart of the S&P 500 for the year 2012:

 

(See Chart of The S&P 500 in The Photo Section)

 

 

Technology continues to be the worst performing sector of the market.  And for the first time almost two years, the stock of Apple (AAPL) has been under-performing the rest of the market. Apple broke below it’s 200 day moving average on Friday for the first time in over a year. Apple is now trading down $120 (17%) from it’s most recent highs of $708. Since Apple has been the leading stock for the stock markets for the past 24 months of this bull market, it’s recent under-performance “could” be a leading indicator of more market weakness to come.

 

Final Job Report before the Election on Tuesday

Today is the day when the Bureau of Labor Statistics (BLS) releases the final Monthly Non-Farm Payroll Job Growth report before the election. This report measures the number of jobs the USA economy added in the prior month. Many of you may remember how last months jobs report released by the BLS created significant controversy

Today’s report showed continuing strength in the employment market. The economy added 171,000 jobs in October. Also, August & September numbers were also revised higher by 84,000 additional jobs,

Leading the gains in jobs for October were the following industries – Note how these jobs reflect how the USA economy has become a service economy:

 

  • Professional & Business Services        51,000
  • Retail                                               36,000
  • Health Care                                      31,000
  • Leisure & Hospitality                         28,000

 

In The Photo Section is a chart of the monthly total job growth in the USA since September 2008. This chart clearly illustrates just how far the labor markets fell in 2008 and how much the labor market has recovered since then.

 

(See Chart of The Monthly Total Job Growth in The Photo Section)

 

 

Fridays release of the jobs report did not result in the same amount of controversy as last months report did. You might remember the charges that the jobs report was manipulated for political purposes.

To test the integrity of the jobs report, we ran an analysis of Auto’s and Light Vehicle sales as compared to Unemployment Claims.

Historically, Auto sales have tracked the employment market in almost a 100% reverse correlation. When Unemployment Claims are increasing then Auto Sales are decreasing. Likewise, when Unemployment Claims are decreasing then Auto Sales are increasing.

In The Photo Section is a chart that we have prepared comparing unemployment claims with Light vehicle (autos) sales for the last 35 years.

In RED on the Chart is  Unemployment Claims.

In BLUE on the Chart is Light Vehicle (Auto) Sales.

 

(See Chart of The Unemployment Claims to new Auto Sales in The Photo Section)

 

 

Note how auto sales are in almost an exact reverse correlation with unemployment claims for the entire period of 35 years. Looking to the right  of the chart, you can see Unemployment Claims starting to decrease coming out of the recession in 2009 and a corresponding increase in Auto Sales. This relationship has continued through October, 2012.  So the continued growth of Auto Sales in proportion to the decrease in Unemployment Claims provides independent confirmation of an improving labor market.

Also providing independent confirmation of an improving labor market is that consumer confidence is currently at 12 month highs.

 

More Confirmation that the Real Estate Downturn is Over & Your Local Real Estate Market is in Recovery

This week saw the release of the latest Case-Shiller home price index for the 20 largest cities in the USA. The index shows that the composite increase is 2% through August, 2012.

In The Photo Section is a chart of the Case-Shiller Home Price Index. The chart shows the year over year percentage change in home prices. You can see from the chart that home prices turned  positive in 2012.

 

(See Chart of The Cae-Shiller Home Price Index in The Photo Section)

 

 

News also broke this week that the world’s greatest investor – Mr. Warren Buffet – has purchased a majority interest in a venture to manage a U.S. residential real- estate affiliate network. Mr. Buffet’s  firm plans to offer a new franchise brand titled “Berkshire Hathaway Home Services”, starting next year. This new firm has previously operated under the Prudential Real Estate and Real Living Real Estate brands.  Warren Buffet’s new Real Estate Services Company is expected to do over $70 billion in residential real estate sales in 2013.

50 Years of history shows that it is good move to be investing alongside Mr. Buffet. Mr. Buffet is making it clear by his large investment in residential real estate services that he believes that the worst of the real estate crises is behind us and that future prospects for residential real estate is brighter.

 

However The Fiscal Cliff Looms and Large Companies are Wary

We have recently reported that the economic outlook is starting to diverge between businesses & consumers. While c. We have a chart which demonstrates how businesses are growing more pessimistic about the near term prospects for the economy.

The US Federal Reserve performs semi-annual surveys of Senior Loan Officers in over 60 banks across the USA . One of the questions that they ask these loan officers is “Is the demand for businesses loans in your area increasing or decreasing”? The US Federal Reserve tally’s the responses and releases it twice a year.

In The Photo Section is a chart of banks reporting stronger demand for business loans. As you can see, the demand for business loans peaked in April, 2012 and has been declining since. October's demand for business loans was negative for the first time since November, 2011.

 

(See Chart of The Growth In Demand for Business Loans in The Photo Section)

 

 

The big three events that businesses are worried about are the Fiscal Cliff,  the recession in Europe and the slowdown in China.

 

Closing Thoughts

The markets are now entering the historically best performing months of the year. Those months are November – April. Over the past 50 years, the vast majority of stock market gains have come during the months of November – April.  Whereas in May – October the gains in the market are historically very small. This is where the old Wall Street Axiom “Sell in May and Go Away” comes from. The markets recent pullback from it’s highs have presented investors with an opportunity to increase equity exposure for this seasonally stronger period of time

Tuesday election will resolve some uncertainty. It appears that Wall Street has now moved towards favoring an Obama victory because of his support for Fed Chairman Ben Bernanke. Mitt Romney has indicated that he would replace Fed Chairman Bernanke if elected. Wall Street is very fond of .

We would expect a rally on Wednesday if Obama wins because Wall Street would assume that Bernanke and the easy money polices which have been so helpful for increasing asset values will continue.

Once the Presidential contest is settled then we would expect congress to finally begin to address the Fiscal Cliff which has much of the Business Community worried. Some estimates are that the Fiscal Cliff will take 4.5% off the USA GDP in 2013. If that were to happen then the USA economy would almost certainly fall back into another recession. And if a recession were to occur you can be assured that  it will impact you and your family at your local level.

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John Patrick Bray, CPA, is President of Bellevue-based Reliance Investment Management LLC  a Registered Investment Advisor Firm.

 

This communication reflects the opinions of Reliance Investment Management LLC and is being provided for informational purposes only and is not intended as a recommendation, an offer or solicitation for the purchase or sale of any security referenced herein or investment advice. It is being provided to you on the condition that it will not form the primary basis for any investment decision.  We recommend that you consult with your investment advisor before the purchase or sale of any securities. The information contained herein is of the date referenced and Reliance Investment Management LLC does not undertake an obligation to update such information. Reliance Investment Management LLC has obtained all market prices, data and other information from sources believed to be reliable although its accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The securities mentioned herein may not be suitable for all investors.


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yaping F November 03, 2012 at 08:22 PM
What would happen with US economy if slowdown in China?
Christie Malchow November 04, 2012 at 02:58 PM
I don't know how you can say the job market is improving when the unemployment rate WENT UP.
John Snow November 04, 2012 at 04:50 PM
Several factors affect the official unemployment rate. One factor is the way the unemployment rate is calculated. For good or bad, the official unemployment rate does not count people who are deemed to have stopped looking for work. Although it is not intuitive, rising job availability can mean that people who had stopped looking for work might return to searching for jobs, and then be counted as unemployed, thus increasing the unemployment rate. Conversely, if everyone in the U.S. who didn't have a job stopped looking for work, the official unemployment rate would be zero. Kind of nuts, huh?
John Patrick Bray November 04, 2012 at 09:10 PM
Hi Christie, >>>>>I don't know how you can say the job market is improving when the unemployment rate WENT UP.<<<<< To answer your question I think that you are referring to this months Unemployment rate increasing from 7.8% (September) to 7.9%? I appreciate the opportunity to expand on this – becau8se by just looking at the unemployment rate went up by 1/10th of 1% a person could easily conclude that the job market is not improving. To start with when analyzing economic data and drawing a conclusion it is best to look at a series of data over time rather than just one piece of information and drawing a conclusion – this is because economic data tends to be volatile from period to period. By looking at a series of data over time, we can reach a more accurate assessment of a condition. Second when determining the strength or weakness of the Job market – we must look at more than one piece of economic data – our analysis will include several: Unemployment Rate – further broken down by Age – Education – etc… Long Term Unemployment rate Labor Market Participation rate BLS Monthly Non Farm Payroll Reports Challenger, Grey & Christmas – A firm that Track Layoffs Nationwide News Releases from Companies & Industries
John Patrick Bray November 04, 2012 at 09:11 PM
From the Bureau of Labor Statistics - The civilian labor force rose by 578,000 to 155.6 million in October – this is what caused the unemployment rate to increase – because over a half million people “Returned to the work force” – this is good economic news – it means that discourage workers are returning to the l;abor market – this happens when the labor market is growing – likewise when thye labor market is contracting – people exit the labor force. – so in October – the growth in Jobs was stronger than expected – however since 578,000 returned to the workforce – and this is the denominators in the unemployment calculation – this caused the unemployment rate to tick up slightly month over mon th. Now if we look at the Unemployment Rate over a period of time – such as the past6 12 month - here is what we see: Group Unemployment Rate Unemployment Rate 2012 2011 Everyone 7.9% 8.9% High School Grad Age 25 over 7.7% 8.1% Some College Age 25 & Over 6.9% 8.1% College Grad Age 25 & Over 3.6% 4.2% I think the above statistics from the BLS does shows that the unemployment rate is improving .
John Patrick Bray November 04, 2012 at 09:13 PM
As stated earlier - the unemployment rate is just one measure of the strength of the Job Market – another is the Monthly Non-Farm Payroll Report also from the BLS – This survey reports the total net job growth in the USA each month. We have included a 5 year chart of this Report in a chart in the photo section of this article. If you look at that chart you can see how far the economy has come since 2008 in producing jobs. The most recent report from October showed 173,000 new Jobs created. This was much higher than the 124,000 expected. Also, August & September jobs totals were also adjusted higher by another 84,000 jobs. Since July, The economy has added an average of 173,000 jobs per month. This is a excellent improvement over the 67,000 jobs a month that the economy was adding from April to June. Another measurement of the strength and weakness of the labor market is initial unemployment claims. In the photo section of this article we have a 35 year chart of initial unemployment claims. If we look at this chart we can see the following: 2009 - Initial Unemployment Claims hit a high of over 600,00 2011 - Initial Unemployment Claims were averaging around 410,00 2012 – Initial Unemployment Claims are now averaging around 360,000
John Patrick Bray November 04, 2012 at 09:14 PM
So we are seeing improvement in this area too. So here is what we have: • Unemployment Rate is lower by a full 1% from 12 months ago • Initial Unemployment claims are 10% lower than 12 months ago. • BLS Monthly Payroll report show the jobs being created at a rate of 100,000 more per month than what was earlier this year. And if you go back to 2009 the improvement is even more evident. Also – we have read recent reports stating that seasonal hiring of worker for the Holiday season will be the highest since 2008. The Firm Challenger, Grey & Christmas – A firm that Track Layoffs Nationwide – reports that through October, 2012 – Layoffs nationwide are 17% lower period in 2011. So when we take all of this information from various sources and combine it together – we feel fairly confident in our assessment that the Job Market “is Improving”. Now is Job Market strong? The Answer is no – it is rebounding off the worst levels in at least 30 years and maybe even 80 years – But the data supports the theseis that the job market is improving. Thanks for your question.
John Patrick Bray November 04, 2012 at 09:33 PM
Hi Yaping - to answer your question about what would happen if slowdown in china and effect on US economy we need to we look at three things: 1. Correlation 2. Supply (export) 3. Demand (import) 1. Correlation - means the relationship between to or more objects and in the case of markets & economics how closely two things track each other. In the case of china and the USA it is clear that all economies and markets in the world are correlated to each other. That is all the world economies are moving up or down together - at different rates of course but in general in the same direction together. This is why when there is a economic slowdown in China and Europe it can be a signal that a slowdown in the USA weconomy could also be on the horizon. 2. Supply - export - -USA companies sell their goods to China - if the Chinese economy starts to contract then there will be less items ordered from USA companies from china. This will result in pressures at USA companies to cut back costs and many times the cost they choose is labor. Washington State might be the most dependent state in the country on exports to China. We export a large amount of timber to china. Also, agriculture in the eastern section of the state is exporting a significant amount of food to china. Also B oeing & Microsoft sell a significant amount of products to china. Starbucks just announced that China will be in largest international market and plans to open 1,500 stores by 2015.
John Patrick Bray November 04, 2012 at 09:44 PM
Part 2 - please see Part 1 Below Now if there is an economic slowdown or recession in China then Boeing, Microsoft, Starbucks, and the agriculture industry in eastern Washington will feel the impact. This impact can result in companies having to layoff staff. 3. Demand - We import a significantly larger amount of goods from china then we export to china. This weekend - American will spend a couple hundred million dollars for clothing and apparel items at target, Kohls, etc. Or perhaps other people will by a refrigerator or air conditioner from Lowes or Home Depot. The result is all this money spent on these products are for products that are manufactured in China. So we spend money here in the USA on goods that are manufactured and imported from China. This is why China benefited so much from our real estate bubble. People took out loans on their appreciated homes and used that money to spend on consumer goods. These consumer goods were produced in china. Therefore all that spending in the USA from the USA Home Credit bubble resulted in the growth of significant numbers of new jobs in........China. What we look at china now is among other things an indicator of how strong or weak the USA economy is. If China is reporting economic weakness than that means the USA economy must be weakening - since the USA is the largest importer of Chinese produced goods.

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