Economic Outlook: Employment Continues to Rise
This has been another full data week and all of it remains very positive.
The flurry of forecasts of the Dow Jones plunging from 18,000 to 5,000, a dire economic calamity, from 6wks ago have faded rapidly in investor memory as the march of economic data continues higher. This week’s monthly vehicle sales came in at a 18.2mil SAAR(Seasonally Adjusted Annual Rate) placing this year’s sales pace at record levels if it continues. Establishment Emp reported at an 271,000 increase and Household Emp Survey reported at an 320,000 increase were much higher than consensus. If you look at the chart below which shows Light Vehicle Sales vs. Household Survey Employment, it should be clear that the trends in place from 2009 continue. What makes equities rise has always been news which was better than expected. My expectation is for equities to continue to rise for 5yrs or more. Optimism which drives equity prices higher remains elusive but it is coming in my opinion.
The reason for my optimism comes from the MCAI. The Mortgage Bankers Assoc (MBA) released its October 2015 MCAI (Mortgage Credit Availibility Index) at 128.4. This index has been rising has been rising 6.9% annually since Jan 2012. The history of this indicator shows 2004’s level of 375 which likely represents a more normal lending range before Sub-Prime lending drove the MCAI to nearly 900 in 2007-see the charts from the MBA site below. Using 375 as the lending benchmark, lending needs to nearly triple for the housing sector to fully recover. Housing has an enormous impact on economic activity and I expect we will see this occur before we see an economic peak.
Based on history and the current gradual increase in the MCAI, one can estimate it is likely to take another 5yrs or so to reach the level associated with full housing market recovery. 5yrs of continued economic improvement while investors fret about the next recession is what I expect will drive equity prices higher. How high equity prices can rise one cannot predict! While we do have the past to offer guidance, market prices remain a reflection of market psychology at that point in time. If we rise to the market excess reflected in 2000 vs. the SP500 Intrinsic Value Index, we could see something close to $5,500 in the SP500 roughly 5yrs from now. Or, investors could remain pessimistic throughout and never turn as optimistic as they have historically. The odds of investors remaining pessimistic this long in the face of improving global economic activity is remote in my opinion.
My recommendation is that investors should continue to stress equities over fixed income and to favor LgCap Domestic, LgCap Intl and some exposure to Natural Resource issues.