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Last week’s initial unemployment claims were 187,000. Since 1967, there have only been 21 weekly instances of a total of 2,976 times in which unemployment claims were lower than the current reading. The low number of unemployment claims indicates a robust job market. Is it? In recent years, there is a new factor to consider. Accordingly, Annie Wong of Bloomberg put out a story shedding light on why unemployment claims may be so low. She points to two reasons why claims data may not be comparable to prior instances. First, eligibility is at a pre-covid low. Typically, eligibility rates increase going into recessions. The current rate has risen, but it is lower than where it has been in all other pre-recession periods. Either there isn’t a recession in sight, or the rate is lower than usual.
Secondly, and more impactful, Bloomberg estimates that the average wage coverage gap is bigger than ever at $1,400. Simply, unemployment claims payouts have not kept up with inflation. On the contrary, gig/part-time jobs have. Therefore, laid-off workers are better off working for Uber and other flexible gig economy jobs. Michael Green of Simplify Asset Management sums this up well. “Effectively, we’ve created private market unemployment insurance with gig economy work where the hassle/compensation of obtaining traditional unemployment insurance is simply not worth it. This is consistent with rising unemployment rates for college grads and suggests that policy is missing yet another important signal.” To his point, low-paying part-time jobs replace jobless claims but make the labor market look healthier than it is.
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Investing Summit: Early Bird Registration Available Now
January 27th, we are hosting a live event featuring Greg Valliere to discuss investing in the 2024 presidential election. What will a new president mean for the markets, the risks, and where to invest through it all? Greg will be joined by Lance Roberts, Michael Lebowitz, and Adam Taggart for morning presentations covering everything you need to know for the New Year.
Register now, as there are only 150 seats. The session is a LIVE EVENT, and no recordings will be provided.
Market Trading Update
Not much changed with respect to the market from yesterday’s update. As such, I wanted to use today’s market update to let you know about the new Dividend Equity Growth Portfolio we launched yesterday at Simplevisor.com.
We have had many requests for an all-equity portfolio with a dividend focus. We started working on this model last year, and yesterday, we allocated 1/3rd of the capital to the portfolio. As with all primary models on the website, these are actual portfolios, and each portfolio is launched with $100,000 in capital. (Unlike most sites that use models, we put actual capital behind our strategies.)
As shown, we allocated about 1/3rd of the capital yesterday into the holdings shown below, and we will “average” into the portfolio over the next few weeks until 100% of the capital is allocated.
Once fully allocated, the portfolio should carry a dividend roughly twice as large as the S&P 500. Furthermore, given that 30% of the portfolio is allocated toward the major holdings of the S&P 500, the portfolio should track somewhat closely to the S&P 500 with lower volatility during drawdown periods.
This portfolio was just started yesterday morning. Once it is fully allocated, we will revisit this portfolio in a few months and see how it performs relative to the market. All Simplevisor.com subscribers were alerted of the launch and the trades yesterday.
Liquidity Ladder
The graphs below, courtesy of Eric Basmajian (EPB Research), show how liquidity flows to various sectors of the stock market, benefitting some more than others. The top left graphs show the S&P 500 is at an all-time high, and the equal-weighted S&P 500 index is closing in on a record high but still has another 5% to go. The bottom graphs show small and micro caps still have plenty of room to go before reaching new highs. Passive investment strategies are predominately market-cap-based. Therefore, most passive money flows to the most well-known large-cap indexes. Accordingly, liquidity flows to the biggest stocks first.
Eric Basmajian sums up his graphs as follows:
This is the “liquidity ladder” and it’s emblematic of worsening economic conditions, not better. Cyclical improvements in the economy always come with outperformance of higher-beta smaller companies, and this is not at all what’s occurring in markets. Smaller and micro-cap stock performance is more relatable to Main Street companies that don’t have preferential borrowing terms in the corporate bond market.
Government Keeps Jobs And The Economy Humming
The strength of the economy is predicated on solid consumer spending. Consumer spending is a function of employment and wages. In today’s environment, we can take that progression another step and say employment is a function of massive government spending. The graph below from Nordea shows that the unemployment rate and the Federal Budget balance as a percentage of GDP tend to be highly correlated. Most frequently, the government uses fiscal stimulus to boost the economy when needed. Conversely, they tend to spend less when the economy is stronger.
Since Covid, that rule of thumb has broken. The unemployment rate sits near 50-year lows, yet government spending as a percentage of the economy is on par with the 2008 recession and at a larger amount as a percentage of GDP than the prior two recessions.
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Related: All-Time Highs for Stocks as Bitter Economic Headlines Persist