Market News – Week of May 7, 2018

3.9%: The U.S. economy added 164,000 jobs in April and the unemployment rate moved down to 3.9%. The Labor Force Participation Rate (the amount of working age population in the labor force) decreased to 62.8%. The added jobs and the workers who left the labor force combined to bring down the unemployment rate. This is the first time that rate has been below 4% since 2000. The average wage earner is making 2.6% more than a year ago.

ALMOST BACK TO EVEN: Markets roared to life on Friday moving up over 1%, but that was not enough to erase the losses from earlier in the week. Markets eventually reacted positively to the April jobs report and the technology sector got a firm boost from Apple which rose 3.6% on Friday after Warren Buffet’s firm announced a major purchase of its stock. Also helping the markets were various data releases in Europe and the U.S. that indicate that wage growth and inflation seem to be growing at a moderate pace. Inflation is one of the major fears right now, so any data indicating that it will not spike will boost markets.

FED STAYS PUT: On Wednesday, the Federal Reserve kept interest rates steady. The common opinion is that it will raise rates two more times this year, and probably in June.

WORKER PRODUCTIVITY: Since the end of World War II, U.S. worker productivity has increased at an average annual rate of better than 2%. From 2007 to 2017, that dipped to a 1.2% average. The latest reading was 1.3% from a year earlier.

RISING ECONOMY?: Zurich Insurance recently released the results of its survey of 497 Chief Financial Officers across 30 countries. 71% expect continued improvement in the U.S. economy over the next three years. The number one concern of this group was potential negative impact from trade protectionism.

ARE STOCKS EXPENSIVE?: Stock prices are measured with a variety of ratios. According to most, stocks are on the expensive side, but have moderated. Here are some of the more common valuation ratios.

• The historical average (1960 to present) for the trailing price to earnings ratio is 16.1, and the current is 20.6.
• The historical average (1986 to present) for the forward consensus price to earnings ratio is 15.3, and the current is 16.3.
• The historical average (1986 to present) for the price to book value ratio is 2.49, and the current is 3.28.

However, the historical average (1986 to present) of price to free cash flow ratio is 28.2, and the current is 24.0. So according to one measure, stocks are not expensive.

Of great interest is that if you break out these valuations by sector, it is not uniform. Using forward consensus price to earnings ratios, stocks in the utility, industrial, financial, energy and consumer discretionary sectors are overpriced. However, stocks in the telecommunication services, real estate, materials, information technology and health care sectors are under-priced. This obvious sector dispersion seems to create the opportunity for actively managed mutual funds to outperform index funds.

Resources:

3.9%: http://www.calculatedriskblog.com/2018/05/april-employment-report-164000-jobs.html
WORKER PRODUCTIVITY: https://www.wsj.com/articles/u-s-workers-productivity-edged-up-in-first-quarter-1525350715
RISING ECONOMY?: https://www.cnbc.com/2018/05/04/us-economy-will-remain-strong-for-next-3-years-cfo-survey.html
ARE STOCKS EXPENSIVE?: Data derived from Eventide CIO update, Finny Kuruvilla (April 2018)