November’s employment data is released at 8:30. Will the statistics continue to surprise on the upside as been the case in every month except one since the commencement of the pandemic.  Perhaps more importantly how will the data impact the bond market?

At some juncture rising rates will impact equities.  Bloomberg opines if the 10-year broaches the 1.05% area, rates could rise to around 1.30% which could then impact equities between 10% and 15%.

I have no idea as to how these estimates were derived but I will write according to Ned Davis Research, “median earnings” for companies it considers institutional grade sits at record high of 38, more than three standard deviations above the 40-year median.

Ned Davis also references Cyclical Adjusted Earnings Ratio, also known as CAPE which is essentially a valuation gauge that factors in 10 years of profits.  It just surpassed the level that preceded the 1929 crash.  At 33.4, the S & P’s CAPE ratio is the highest ever outside of the dot com bubble.

A major variable of CAPE are interest rates…discounting the present and future expected cashflow by some interest rate.  With many the highest capitalized issues trading at 20x cashflow, there is absolutely no room for error.

And then there is liquidity risk.  Bloomberg reports by historical measures, “liquidity in the equity market is absolutely abysmal.”  Many may question this finding given today’s massive volume.  Bloomberg calculates liquidity by how much turnover expressed as a percentage of market capitalization is associated with a 1% range in the S & P 500.

I ask what happens if the unemployment data continues to surprise on the upside, indicating budding cost push inflation?

Wow, this sounds radical but it is a fear manifested by former FOMC Vice Chairman and NY Fed President Bill Dudley.  Dudley, who served in these positions from 2009-2018, commented the actual outcome versus the expected outcome of measures taken from 2009-2018 were vastly different.  Dudley said he and others were greatly surprised “escape velocity” never materialized until 2017.

Consensus is expecting a 475k and 540k increase in non-farm and private sector payrolls, respectively, a 6.80% unemployment rate, a 0.1% increase in average hourly earnings, a 34.8-hour work week and a 61.7% labor participation rate.

It is often written history often mimics itself.  In many regards, today is similar to 2000.  The question at hand will 2021-2026 be similar to 2001-06 when the economy expanded around a 3.5% rate and the typical stock rose exponentially at the expense of the indices?

Unfortunately, only history will answer this question but if terms such as median, standard deviation and mode still have any significance and if there is a such thing as “natural laws of economics,” the odds favor a similar path to that of  20 years ago.

Commenting about yesterday’s market action, equities trimmed its advance on a late day news that Pfizer will deliver fewer doses of the vaccine in 2020 than expected because of supply chain issues.  Equites were inspired by the continued discussion for a stimulus bill by year end.  Treasuries were flat as was oil and the dollar.

Last night the foreign markets were mixed.  London was up 0.87%, Paris up 0.40% and Frankfurt down 0.04%.  China was up 0.07%, Japan  down 0.22% and Hang Sang up 0.40%.

The Dow should open nominally higher on stimulus and economic optimism but this could change radically given the potential significance of the 8:30 data.  Oil is at nine month high and the dollar is headed for the biggest weekly decline in five years.  The 10-year is off 7/32 to yield 0.93%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.