Mike Lipper’s Monday Morning Musings
Data Driven Reactions Dangerous
Editors: Frank Harrison 1997-2018, Hylton Phillips-Page 2018 –
Starting with the unemployment statistics published on the next to last Friday of the month, we have experienced whipsaws for the seven trading days since then, impacting stock prices by approx. 10% from top to bottom. Both the extreme highs and lows were “gut” reactions to the perception of what the numbers signified.
Employment Surge
Each month the federal government announces the level of employment and unemployment based on the week closest to the middle of the month. In this case it was released before the Friday morning opening the week ended May12th. What surprised many people, particularly those who were bearish, was that the number of people employed actually rose instead of declined.
US stocks prices surged and if investors understood when and how these numbers were constructed they should not have been surprised. First, throughout the month of May and into June, various business in largely non-coastal states were reopening, bringing back some of their workers. (The number continued to grow, at least through this last week.) Second, there was a relatively slight change in the classification adjustment as to which people were reported as employed.
The announcement came on a Friday morning, often a low volume trading day during warmer weather. It was probably exaggerated by many of the active traders sheltering at home or beginning a three-day weekend. Furthermore, since March 23rd many stock prices have risen materially. Bank of America (Merrill Lynch) published the Farrell Sentiment Indicator, named after their former great market analyst, showing this rise being the most “hated” rise in history. (The indicator is based on surveyed six month market projections over the prior ten weeks by the American Association of Individual Investors.) Consequently, it was not surprising to believe there were a lot of short sellers. Opening prices jumped and we suspect many purchases were made to close short sales and limit loses, either voluntarily or involuntarily.
Spike in COVID-19 Numbers
On the following Monday, higher numbers of victims of the Coronavirus were announced. The number of tests jumped as did the overall number within hospitals, although few noticed. Furthermore, as various communities open-up from lockdowns, one suspects more people will be tested and quite possibly contract the plague.
Appropriate Investment, Not Trading Reactions
Careful analysis of both announcements should have led one to conclude that first was positive and the second negative, but not to the extremes the market took each impulse. More importantly, the history of market investing for long-term investors is that they are not swayed from their focus on meeting their long-term goals. Unfortunately, a reverse in market direction is often an excuse to plow reserves back into the very investments that created prior losses, doubling down on the prior mistake instead of shifting into sounder investments. Before accepting the results of various statistics you should understand how and why they are constructed the way they are.
We find the same needs beyond investing, as illustrated by the following:
- In most communities the entry age to grammar schools is calendar based, often with September 30th being the cut off. (Some parents, believing their youngsters are not as mature as they should be to enter school, keep them out and place them in school the following year, giving them a competitive advantage academically, socially, or athletically.)
- COVID-19 reports end on Saturday, as some communities view the Sunday data as being unreliable. (Interesting, I found the same unreliability when I started to collect and measure mutual fund performance in the 1960s. We could not call back a number of east coast funds on Friday and question their net asset values and dividend data. Thus, we ended our week on Thursday, which is still the practice.
- For marketing purposes, all thoroughbred horses officially have their birthday on January 1st. One of the elements used to help pick winners in the most difficult maiden races of two-year old’s, was to attempt to find out when they were actually born. In absence of that data the size of the colts and fillies was a clue, as young horses grow bigger with age.
In the table below you can see that we are going through three somewhat different markets, as captured by various indices. One could assign labels to the three indices in an oversimplification, based on the primary drivers of each: NASDAQ (Seasoned Speculators), S&P 500 (Large investors, particularly with limited research staff), Dow Jones Industrial Average (Media, retail investors, and active traders)
Date of % Change % Change
Index 2020 High to 6/13 for Week 2020
DJIA Feb 12 -13.35% -5.55% -10.28
S&P500 Feb 19 -10.18% -4.78% -5.86
NASDAQ June 10 -4.31% -2.30% +6.87
By losing less the NASDAQ beats the DJIA, although at some point the gap may close.
Another set of year to date data through Thursday is the performance of the three leading mutual fund sector averages: Global Tech +9.48%, Domestic Tech (largely domestic) +6.66%, and Precious Metals +6.37%. Large Cap Growth funds +4.42% and Convertible Securities funds +4.26% were also leaders.
An Unheralded Way to look at National Data
As evident to all our readers that I pour over all sorts of data to help me think through the investment problems of our clients. The ensuing discussion looks at our economy in a very different way for analytical purposes, not to begin a discussion as to individual and national priorities. The data quoted is from Wikipedia and covers federal data through 2019 and state/local data through 2015. If the combination of federal, state, and local government data provided to and for our people was done by private enterprises, economists would label it as services activity. There is probably no single recipient of these services that approves of how the combined expenditures of federal, state, and local governments are spent. Nevertheless, out politicians believe that enough people approve of each item, although for the most part we have not been asked.
The math includes not only those items paid for by income taxes, but also sales and use fees. (Thus, the cost of your drivers’ license, registrations, admissions to parks, and utility fees are included.) In fiscal 2019 the Federal government reportedly spent $7.3 trillion (34% of GDP). States spent $3.7 trillion and local authorities $1.9 trillion, for a combined total of $12.9 trillion out of a GDP of $21.4 trillion, suggesting the combined governments are spending about $39 thousand per person in this country. You can dispute the accuracy of the numbers and adjust for the very likely increase in governments spending in this year of lockdowns without meaningful government lay-offs. Any number between $20,000 and $50,000 per person is a large number, assuming the working poor brings in $20,000. The average working person has become middle class. Those with children and other non-workers are not doing badly either, compared to people all over the world. This is not to say we have developed an efficient system to provide critical services to all our inhabitants.
These issues will only become more binding in the future and have been with us for a long time. Since 1990 the Federal portion of total spending has grown at a rate of 4.6% per annum and taxes at 4.3%. I suspect State and local spending has grown faster, but taxes and fees have probably risen close to the same level.
The growing gap of spending vs. revenue generation cannot continue forever. As a corporate stock owner, I wonder whether these concerns will lead to lower profit margins and dividend growth.
We need to get some of our best minds to work on this.
Did you miss my blog last week? Click here to read.
https://mikelipper.blogspot.com/2020/06/caltech-data-heretics-go-to-track-for.html
https://mikelipper.blogspot.com/2020/05/mike-lippers-monday-morning-musings_24.html
https://mikelipper.blogspot.com/2020/05/time-to-review-investments-weekly-blog.html
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