Daily Commentary

MarketMinder’s View: “Companies added 42,000 jobs for the month, following a decline of 29,000 in September and topping the Dow Jones consensus estimate for a gain of 22,000. A revision for September showed 3,000 fewer jobs lost, the payrolls processing firm [ADP] said. ... All of the job creation came from companies employing at least 250 workers. That category added 76,000 jobs, while smaller businesses lost 34,000.” So while we are unlikely to get the Bureau of Labor Statistics’ jobs report as usual this Friday, ADP’s report suggests ongoing private-sector employment growth in October. And there is more data to come: “Challenger, Gray & Christmas on Thursday releases its monthly look at announced layoffs, while economists will watch state-level jobless claims for a look at whether companies are shrinking payrolls.” None of this is a gamechanger for forward-looking markets, as labor data lags, reflecting past economic conditions. But as the latest available reports reveal, markets aren’t flying blind.

MarketMinder’s View: While government shutdowns have never caused a recession or bear market, that doesn’t mean they have no market effect. As this article relates, bonds and contracts tied to CPI—e.g., Treasury Inflation Protected Securities (TIPS) and inflation swaps—are having to resort to “fallback mechanisms” in the absence of the Bureau of Labor Statistics’ October (and possibly future) price data. For example, TIPS’ principal—and payouts—depend on CPI readings. So, “If there’s no October data, then the Treasury will announce a synthetic number ‘based on the last available twelve-month change in the CPI,’ which is between Sept. 2024 and Sept. 2025.” With inflation trending down, though, “That’s already leading to the outperformance of a TIPS maturing in January on the prospect of a greater payout. The longer this shutdown persists, the greater the distortion of a market used by investors to protect against price increases and policymakers to gauge inflation expectations.” Meanwhile, inflation swaps use a different methodology, creating further discrepancies and distortions. Now, this isn’t a huge problem for bond markets. Not only are the fallback procedures known (they are literally written into the products’ rules), but some investors are acting on the (so far minor) pricing anomalies. Hence, the surprise power seems low, minimizing their wallop potential for markets. So while something to keep apprised of, we don’t see anything here to get worked up about.

MarketMinder’s View: The famous method here is the cyclically adjusted price-to-earnings ratio (CAPE), which compares 10 years of bizarrely inflation-adjusted earnings to nominal prices and aims to project returns over the next decade. The claim (and chart) here showing the S&P 500’s CAPE above 40 in “nosebleed territory” sounds scary, and the piece argues it means US equity returns will be low for years. It was last above that level in 2000, when the Tech bubble popped, and the next decade wasn’t good. Fair enough. But the same chart shows recent elevated readings in January 2018 (33.3) and November 2021 (38.6)—which were also levels last seen in the early 2000s. From January 2018, the S&P 500 Total Return Index is up 172.6% through yesterday’s close, and from November 2021, 57.2% (per FactSet). Yes, 2022’s bear market (which wasn’t valuation-driven) was a setback, but those returns highlight key problems with CAPEs: For one, they aren’t ironclad. The Yale research referred to here found only 40% of 10-year returns were explained by CAPE valuations, meaning the majority were caused by something else. Two, they tell you nothing about the journey to whatever returns you reap in a decade. After all, you might have eight boom years and two bad ones, randomly disbursed in that period. Investors probably care a lot more about where the good and bad years lie than the full journey. Besides, elevated valuations can always go higher—they just aren’t predictive of turning points or even returns over set periods. Why don’t they work better? Despite the conventional wisdom that P/Es, cyclically adjusted or otherwise, are useful in determining how much stocks should be worth, they fail because they rely on backward-looking earnings or widely publicized forecasts—which stocks have already priced in. And they are among the most widely watched metrics in all of investing, yielding no edge to practitioners. (Please note, since the article mentions a few specific companies, MarketMinder doesn’t make individual security recommendations, focusing on the broader theme only.) For more on why CAPEs and other measures aren’t anything to fear or cheer, please see our July commentary, “Shake the Valuation Fixation.”