07 Mar POLITICS, THE LPR AND VALUE INVESTING
Will political uncertainty begin to weigh upon equity prices? The world is dramatically changing. The EU holds elections in May and right of center parties are expected to capture over a third of the seats. France’s President Macron is desperately appealing to the populace to continue with the status quo of the globalists utilizing comments such as this is the greatest threat to the political order since WWII.
And then there is Brexit. How will this unfold?
In the US, the socialist rhetoric is rising every day and a public split is occurring in the Democratic Party between the newly elected members of Congress and those of the Establishment which hold more moderate views.
Finally there are the ongoing Trump investigations. Is this noise or will it morph into something of significance. One can conclude that such will be ignored and it is an example of the Democrats overplaying their hand. On the other hand even though little new may be learned the inquiries will ground the Administration into the ground via exhaustion and alleged issues will remain front of center until 2021.
Personally I am exhausted by the vitriol emanating from both sides of the aisle but will acknowledge it is part of the democratic process. Even though I was only a child in the late 1960s and early 1970, I do not think the intensity today is as great as it was in those years. Cities are not burning and college protesters are not being shot.
Radically changing topics, the OECD again lowered global GDP forecasts, the result of trade and European weakness.
Commenting upon trade, the trade deficit rose to the highest level in 10 years, the result of American economic strength and the value of the dollar.
Tomorrow is the release of February’s labor report. Yesterday the private sector private sector ADP report was nominally lower than expectations but there was a huge upward revision in January’s data. Many have been perplexed about the lack of wage inflation. [Note: wages are rising at the greatest pace in a decade albeit not at the pace most would expect given current perceived conditions]
I will argue it is the result of a low labor participation rate (LPR). There is a vast pool of uncounted workers that can potentially reenter the workforce as conditions improve, thus permitting greater economic growth than expected accompanied by nominal inflationary pressures.
The LPR is over 3% lower than when the economy exited the recession in 2009. I believe the low LPR is a major reason why economic growth languished around 1.3% during the Obama Administration. Since 2016 the LPR has increased about 1%, a major catalyst for today’s growth rate.
Markets traded lower yesterday on growth fears.
Speaking of growth, Stanford Bernstein wrote yesterday the gulf between value and growth is at the highest level in seventy years. Wow! Bernstein writes that since 2006 value has lagged growth and the gap between the cheapest and priciest companies is now at levels that cannot be ignored. The analysts commented that there could a considerable rebound in the value investing strategy in the next 6-12 months.
To put this period into a different perspective, the guru of value investing, Warren Buffet, bought Berkshire Hathaway in 1962, thirteen years after the difference between value and growth was at today’s levels.
Last night the foreign markets were down. London was down 0.38%, Paris down 0.32% and Frankfurt down 0.45%. China was up 0.19%, Japan down 0.65% and Hang Sang down 0.89%.
The Dow should open moderately lower on growth concerns. The 10-year is up 4/32 to yield 2.68%.