Against a backdrop that included a sudden burst of political chaos in South Korea, Israel threatening to expand the war if the Hezbollah truce collapses, and China issuing a ban on exports of critical minerals to the US, the S&P 500 and Nasdaq Composite indices were unfazed and made new all-time highs this week. Offsetting some of this geopolitical news was the US Labor Department’s announcement that job openings increased by 372,000 in October to 7.74 million jobs. Layoffs declined by 169,000, the most in 18 months, indicating a stable employment environment. However, hires fell by 269,000 to 5.313 million, dragged lower by declines in construction, manufacturing, finance and insurance, professional and business services, and the leisure and hospitality industry. The hires rate dropped to 3.3% from 3.5% in September, but the Labor Department also indicated that there are 1.11 job openings for every unemployed person in October. This was up from 1.08 reported in October, but below the 1.2 ratio seen prior to the pandemic and below the 2.03 peak seen in early 2002. Overall, this report suggested the labor market is well anchored.
Solid Economic News
The revision to third quarter GDP revealed few changes and showed the economy increased at a 2.8% (SAAR) pace, down slightly from the 3% rate seen in the second quarter of the year. However, both of these quarters suggested the economy was growing just below the long-term average of 3.2% and was thereby expanding at a healthy pace.
Yet despite this hearty growth in the economy, at the end of the third quarter, total US market capitalization rose to 2.13 times nominal GDP. This ratio is not far from the record 2.2 recorded in June of 2020 (in the midst of the pandemic) and well above the previous record of 1.83 made at the March 2000 bubble peak. See page 3. More importantly, the stock market has been booming since the presidential election, and if we were to use today’s market capitalization and compare it to September’s GDP, it would set a new record at 2.25. In short, various forms of market valuation indicate the current stock market is very richly valued. Nonetheless, the exuberance surrounding the re-election of Donald J. Trump is overruling a host of geopolitical and fundamental issues and that is likely to continue through the end of the year.
Meanwhile, a number of data releases imply the economy is on solid footing in the final quarter of 2024. In October personal income rose a solid 5.3% YOY, up from 5% in September, and above the 49-year average of 5.2%. Real personal disposable income – which is key to personal consumption — increased 2.7% YOY, up from 2.6% a month earlier, and is just slightly below the 40-year average of 2.8%. The savings rate increased to 4.4% from 4.1%. In sum, personal income trends were improving for the average household.
Personal consumption increased a hefty 6.8% YOY in October, up from 6.6% in September, and well above its 40-year average of 5.4% YOY. This was due primarily to the consumption of services, which rose 9.8% YOY at the start of the fourth quarter, versus goods which increased 0.7% YOY. Yet it is also worth pointing out that since the beginning of the year the consumption of durable goods has been negative on a year-over-year basis which means the modest 0.05% YOY decline in October was a significant improvement. See page 3.
We noticed that government transfer payments were an important part of personal income growth in 2024 and grew a whopping 12.7% in October on a year-over-year basis. Total social security payments grew 6.9% YOY, Medicare rose 16.7% YOY, Medicaid increased 6.8% YOY, veterans’ benefits grew nearly 30% YOY, unemployment insurance payments increased 63% YOY, and other government subsidies increased 20% YOY. In many cases, the growth in government subsidies in 2023 and 2024 were retroactive adjustments to the high inflation rates seen in 2021 and 2022. The increases in social security and veterans’ benefits were due to a combination of a growing number of participants and COLA increases. The 20% increase in “other” government transfers was interesting but not surprising in a presidential election year. However, the 63% YOY increase in unemployment insurance surprised us and this suggests that Friday’s employment report for November will be important, and we will be looking to see if there is an adjustment to October’s release and if there is a significant rise in the number of unemployed in November’s report. See page 5.
The manufacturing sector has been the weakest segment of the US economy for a long while, but there may be green shoots on the horizon. The ISM manufacturing index, which has been contracting for 24 of the last 25 months, actually rose in November to 48.4 from 46.5 in October. Hopefully, this index will inch its way back above the neutral 50 level in coming months. President-elect Trump’s focus on increasing US energy production and manufacturing could help this trend in 2025. Overall, the details of the ISM report were mostly positive, and the new orders, production and employment indexes all moved higher. November’s data for the ISM service indices, which have been the strength of the US economy for the last two years and were strong in September and October, will be reported later this week. See page 6.
Technically Robust
While the S&P and Nasdaq Composite indices made new highs this week, most other equity indices have also recorded all-time highs recently, including the DJ Transportation and Utility averages, which makes Dow Theory positive. The Russell 2000 index has been testing its record high of 2442.74 on an intra-day basis, but to date, has failed to close above it. This will be the most interesting index to monitor in coming weeks. Nevertheless, the charts of the popular indices are positive and display good momentum. See page 9.
The 25-day up/down volume oscillator is 1.14, neutral, and relatively unchanged from last week. The good news is that this indicator is not yet overbought, which would be indicative of a stretched or vulnerable marketplace. However, since this indicator measures the level of volume supporting an advance, we would be concerned if the oscillator does not reach overbought territory in coming weeks to confirm the new highs. In sum, this indicator suggests there is room for the current rally to move higher, but we will be looking for volume in advancing stocks to improve. See page 10.
The 10-day average of daily new highs is 397 this week and new lows are averaging 64. This combination of new highs above 100 and new lows below 100 is a bit stronger this week and remains positive. The NYSE advance/decline line made a new record high on November 29, 2024. These breadth indicators are uniformly positive. See page 11. Last week’s AAII sentiment survey revealed there is no bullish extreme on the part of individual investors and this is good news. In fact, bullishness fell 9.6% to 31.7% and bearishness increased 5.4% to 38.6%. Bullishness is now below average, and bearishness is above average for the first time since April 24, 2024. All in all, momentum remains with the bulls, at least in the near term.
Gail Dudack
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