Published May 11, 2018
Expectations for the market heading into 2018 were very high – that company earnings would be up 18 percent year on year. The market was stretched to meet these high expectations. Aided by the tax cut bill, actual earnings far exceeded forecasts. By early May, with most companies reporting, actual earnings were up an astounding 27 percent. Normally, one would expect the market to show a similar increase, but it did not. The market has barely moved since the start of 2018, compared with a 7 percent increase as of this time last year.
With earnings strong, the price-earnings ratio of the market dropped from over 18 times earnings to about 16 times earnings – closer to the historical average. Fixed income became a better investment than equities; even cash earned more than equities because equities remained flat since the start of earnings season. Yields on the 10-year Treasury bond rose to 3 percent, making fixed income competitive with equities. In addition, volatility rose dramatically. Was the market getting tired? Was the market tipping over?
The May jobs report came in with the number of jobs created at 164,000, down from the expected 192,000. But the rate of unemployment fell to 3.9 percent – the lowest since December 2000. The rate of unemployment for black workers fell to 6.6 percent – the lowest ever. Wage growth was tepid at 2.6 percent.
Meanwhile, the labor pool is shrinking: 410,000 more people dropped out of the workforce, out of a total of almost 96 million employed. This shrinking labor pool is the largest reason for the drop in the unemployment rate. A shrinking labor pool is not good […]