Jobs recovery stalls
A disappointing set of nonfarm payrolls figures from the U.S., with only +49,000 jobs added, versus loftier market expectations of +105,000.
And December was revised all the way out from -140,000 to -227,000, which makes for an ugly print overall.
The 3-month average payroll gains slowed to a trickle, now at under 30,000.
As such the American jobs recovery appears to have stalled somewhat, with only 56 per cent of the 22 million lost jobs recovered to date, although the record daily vaccine numbers give some hope that the recovery will continue throughout.
By way of comparison, Australia has already seen a remarkable 90 per cent of lost jobs recovered, and we could well be back to above a record 13 million employed in the first half of this calendar year.
On the plus side, the U.S. unemployment rate fell from 6.7 per cent to 6.3 per cent on lower participation, and looking at the trend it's not out of the question that we could see an unemployment rate back at 4 per cent or lower within a year or so.
The underemployment rate also declined from 11.7 per cent to 11.1 per cent.
Higher participation is not always a good thing, and slack is still moving in the right direction.
---
I'm not really one for 'it will end in tears' type commentary, but it should still be recognised that the potential for a pretty ordinary decade of stock market returns is a real threat from these levels.
The US price-to-sales ratio has climbed above 2x once before during the tech boom/bubble, before ultimately retracing all the way down to 0.8x by 2009.
We're on a whole other planet in today's market, with price-to-sales scaling unprecedented heights in notching a ratio of 2.9x this week.
Earnings can be manipulated, sales not so much...
For reference the median price-to-sales ratio has been 1.5x and the mean is now being pulled higher to a notch under 1.6x.
A full earnings recovery is now expected in time, but the smoothed 10-year U.S. CAPE ratio is also at by far the highest level in the history of stock markets, ex-tech bubble, at above 35.
You can look at pretty much any other metric, including price-to-book or the earnings yield, but they'd tell a broadly similar story.
I have no special insights as to when momentum might become mean reversion, or what the trigger for that might be, although it's noteworthy in passing that inflation expectations are now at the highest level in the 8 years since March 2013.
On the plus side for stock market investors, valuations are generally speaking far more sedate in emerging markets and in Europe, especially in the UK, which still looks to be decent value even now (which itself contradicts the widely pushed 'low interest rates justify record high stock valuations' narrative).
Likewise Australia's valuations are less stretched, and arguably we could be in for a decent decade given the brightening outlook for commodities, although the perennial risk is that a U.S. tantrum or meltdown brings markets around the rest of the world south in sympathy.
By way of disclosure, and as mentioned here at the time, I was mostly out of stocks by the beginning of 2020, but alas didn't pile back in on March 23, except for buying a small handful of energy positions and a few FTSE favourites, and ended up pulling the trigger on buying a house as an investment property instead.
At the end of the day you have to go with what's best for you and your portfolio, and from a total return perspective I reckon this will work out well enough for me over the next 5-10 years, especially given that I can envision mortgage rates comfortably falling to a 1-handle in Australia.
I'll keep watching stocks for more value with a sceptical eye, albeit now with less dry powder than a year ago!
