As I flagged last week we had these out yesterday and as forecasters had predicted the headline rate of unemployment came back down this month. In the event this was by more than expected with the headline number coming in at 3.8% rather than the 3.9% forecast by the consensus. This is good news in so far as it take the rate back below its moving average and means that for now we can ignore the signal from the market timing indicators again.
The headline jobs numbers themselves and signs of faster rising wages did seem to spook investors a little, although I note the three month average job creation still looks fine. As with the headline rate it may well be that the actual job numbers have been distorted in the last couple of months by the US Government shut down too.
Thus as it stands it still looks as though the US economy is going along reasonably well in the short term given the above and the ISM indices still being well above 50 suggests that no US recession is imminent - famous last words! I also wonder whether we could still see the economy moving ahead for a lot longer yet, given what happened in the last cycle. Indeed the 2000/2002 downturn doesn't even show up in these annual US GDP numbers (shown below), although it was generally categorised as a recession as far as I remember, probably due to the at least two consecutive quarters of negative growth definition.
So may be we could see something similar this time with a mid cycle slowdown causing a valuation driven correction followed by more Fed easing and a resumption of the bullish trend, perhaps? The reason I say this is based on some work on cycles that I read a while back in Money Week which I made a point of keeping as it tied into the property cycle work I have covered in the past in the book by Fred Harrison and how this drives the economy too.
I reproduce the Money Week article below at the end of this piece, so take a look and see what you think, as given when it was written, the calls it made have been remarkably accurate up to now. The next stage it foresaw was a mid cycle slowdown / recession around 2019/20 followed by the rest of the bullish cycle up to 2025/2026 and with the FTSE up to 12,000 by then, happy days.
Finally, as a largely UK investor (yes I m prone to home investor bias) I think we are slightly better placed in terms of valuations, although that may just reflect the heavy weighting we have in mature slow growth / low return industries such as Banking, Mining & Oil.
Aside from this though there are always stock picking opportunities out there which you should probably focus on rather than indices, unless your an index investor. So if you are looking for more stock ideas or inspiration for that then don't forget you can find hundreds of good quality growing dividend stock ideas in the Compound Income Scores.
February was another good month for equity markets generally with the US S&P 500 continuing its strong run and regaining levels above its 200 day moving average in the process. The UK market also continued to rally although in common with other markets it lost some momentum toward the end of the month. Nevertheless the FTSE All Share still produced a positive total return of 2.3% which leaves it up by 6.56% for the year. In terms of where this leave the market in relation to the timing indicators. Unlike the US the UK market has not yet recovered beyond its 200 day moving average. It therefore remains below its moving averages that I use for this purpose by around 1.3% for the main indices and 2.2% for the Small Cap, although during the month it did look as though these would turn positive.
The Compound Income Portfolio had actually had a negative month, which may be not that surprising after its massive out performance in January. Thus it sagged back by 0.5% and thereby under performed this month by 2.77% but this still leaves it up by 8.23% for the year which is still ahead of the FTSE All Share by 1,67% year to date and 45.31% since inception in April 2015. Most of the damage was done by a couple of Marmite type stocks which score well but that some, including me, would find unpalatable to buy. These together with some draw downs in some more cyclical stocks explained the set back and while risers were in the majority, they were not sufficient to offset the losses from the big losers.
This months screening has thrown up a couple of potential trades, both of which I could question because one is a classic quality compounder, although its rating reflects this like a lot of these situations. while the second one is lower quality and therefore more lowly rated, but does have results coming up this month and had the CEO buy some shares recently. Nevertheless I decide to push the button on these for the Compound Income Portfolio and replaced one of these with a stock that brings something different to the portfolio, subscribers to the Scores will be able to see the details of these transaction in the Scores sheet when it is updated on Monday.
In light of the timing indicators mentioned above I decided to keep the second unit of cash raised as a precaution in case the market should relapse and retest its lows. I am however disinclined to take the hedging any further than that at this stage as we are not due to get the latest US Unemployment data until Friday 8th March. Having read around and looking at the commentary and forecasts on Trading Economics for this, I see that it is generally perceived that the US government shut down may have distorted last months figure and this month the rate is expected to fall back again to 3.9% which would probably reverse the signal from this or make it neutral at least for now. The other reason for waiting is that I also came across a more detailed model using unemployment as a recession timing indicator and this one suggests taht we would need to see US unemployment rising to 4.1% before this is triggered on their model. Waiting will also give us a better idea if the market recovery is likely to be sustained or if we see it relapsing this month and heading for a retest of the recent lows.
Whatever happens it still feels as though we are in the latter stages of this bull market to me, although who knows how much longer it can go on? Maybe we are into the last hurrah topping out process, where you have a peak, then a recovery which fails to break the high - I think we have seen this pattern before (see graph at the start of this post). So it will be interesting to see how this one develops from here or whether the Fed's change of heart and the minting of the Powell put can keep things humming along for a bit longer yet?
Amazing to see at the after Oscars Party that even the Luvvies and pop stars are up with the trend too in the video below - perhaps? Or for Older readers maybe a bit of Elvis could call it from here too?