“Davidson” submits:
The two major monitors of economic activity which I find most helpful in a long term investment approach are the trends of housing markets and the trends of employment. The Housing Market Index(Chart 1: HMI) and Monthly Supply of New Homes for Sale (Chart 2: Monthly Supply of New Homes for Sale) continue to trend in positive territory ($XHB). Weekly Jobless Claims as a percentage of Household Employment(Chart 3: Household Employment vs. Percent Weekly Claims) have hit the lowest level ever recorded in this series. Net/net regardless of the concerned economic commentary of which we seem to have an endless supply lately, the facts on the ground look very good.
The HMI July 2015 comes in at 60 while June was revised from 59 to 60. Historically the NAHB HMI leads the direction of housing activity. Look for higher level of homebuilding for the next couple of years and for higher New Single-Family Starts levels. This should prove good for housing and associated sectors of the economy and historically has been reflected in higher stock prices ($SPY). The Monthly Supply of New Homes for Sale confirms what is being seen in the HMI trend.
The Chart 3: Household Employment vs. Percent Weekly Claims is a new study and very revealing of our current economic condition. At a weekly claims level of 255,000. this is close to the lowest absolute level since August 1973-see BLACK LINE. But, as a percentage of those employed, May 2015 comes in at the lowest ever recorded 0.18% with June 2015 at 0.19%-see DASHED GRAY LINE.Meanwhile Household Employment is at all-time highs with June 2015 at 148,739,000 individuals working-see BLUE LINE.
My expectation that market sentiment would have turned generally more positive at this stage of our economic cycle has not been fulfilled. I make no apologies for missing this. Market psychology is the basis of market prices and there is nothing exact about predicting market psychology across a market cycle. It appears we continue to have a dearth of ‘Critical Thinking' with investors using the price of one stock or asset to justify the price of all others. We see ‘high fliers' continue to fly-high as investors seek to have what appear to be the winning team in portfolios from a price appreciation point of view and pay literally zero attention to fundamentals. History shows that fundamentals do win out in the long run but can be ignored for 2-3yrs at a clip.
Personally, I continue to like cyclicals, the infrastructure companies which are the basis of production and housing even though markets find them not interesting at the moment. The highly touted ‘growth' companies mostly have no earnings as they are spending hand-over-fist to acquire revenue with only a promise of profitability at some point in the future. You hear of these names every day in the media, but revenue growth without growth in Shareholder Equity is no growth at all.
If one is investing in company specific situations, markets may have disappointed of late. But, using mutual funds one gets carried along with the asset class and on balance diversified portfolios have held their own. Nothing has changed my opinion that our economy is likely to have another 5yrs or so to go before we see a peak. What we are seeing in the employment trends (very bullish) and the need for housing people who desire the American Dream and who can afford it remains quite strong. Housing when it is trending higher adds significantly to economic activity and positive market psychology.
At the bottom of this note I added several charts from the St. Louis FRED system. The history of employment is tied closely to that of Real Disposable Personal Income. This is where we get the means to buy vehicles and homes. Real Disposable Personal Income is at an all time high.
I continue to expect market psychology to catch-up with economic fundamentals as it has historically. The better asset classes appear to be LgCap Domestic and International issues and even with falling commodity prices at the moment a position in NatResources appears warranted.
