The theme of the week is going to be jobs. The biggest report is going to be the employment report on Friday. But before that we will get some more data like the Challenger Gray and Christmas count of big layoffs, and the ADP (ADP) survey. Those will offer some clues to the big report.
Warning, though: the ADP survey is often very different than the official BLS report. However, once all the revisions are in, the two surveys tend to track each other pretty well.
The consensus is looking for the unemployment rate to remain stuck at 9.1%. The unemployment rate, though, can be deceiving. In the last two months, the civilian participation rate has ticked up, but from a 27-year low in July.
A change in the participation rate can have a big effect on the unemployment rate. If the rate were to stay the same or even tick up a bit, but it was due to a big increase in the percentage of people looking for jobs rather than thinking the situation was hopeless, that would actually be a good thing.
The consensus is looking for the number of jobs added overall to slow to 88,000, from 103,000 in September. It expects both a slowdown in the rate that the private sector has been creating jobs, and also a moderation in the rate of government layoffs.
The Private sector is expected to add just 114,000 jobs, down from 137,000 last month. That implies a loss of 26,000 government jobs, down from a loss of 34,000 in September. I disagree, and suspect that the private sector will actually do much better than that, but it will be offset by at least as many government jobs.
Average hourly wages are expected to grow at 0.2% (not adjusted for inflation), the same pace as last month. The average workweek is expected to remain unchanged at the 34.3 hour level it has been stuck at for a long time. That is important, and it a strong argument against the notion that it is businesses afraid to hire new workers because of the cost or uncertainty due to new regulations or taxes. Most of those costs could be avoided by simply having existing worker work longer hours. It is a lack of customers with cash to spend that is holding back hiring.
The Fed Meeting
The other big event of the week is going to be the Fed meeting. There have been some hints recently by some of the people on the committee that another round of Quantitative Easing is coming, this one again focused on mortgage backed securities. However, the Fed is deeply divided, and the last two meetings produced three dissents for relatively minor moves like clarifying what was meant by “an extended period” for keeping rates near zero (mid 2013), and rearranging the deck chairs through Operation Twist.
QE3 would be a more significant move than those, and I’m sure the disagreement would get very heated. If I were on the committee, I would vote n favor of doing so. Even though growth was better in the third quarter, we are still operating FAR below potential, unemployment is unacceptably high, and core inflation is still low by historical standards. That adds up to a need for a more accommodative monetary policy to me.
The market has staged a remarkable run since its October 3rd low, with the S&P up 16.9% since then. That makes it one of the best monthly gains on record. Valuations though are still not stretched, and I think it is possible that we continue to drift higher through the end of the year.
Year-End Predictions
My long-standing target of 1325 by year-end now looks very achievable and perhaps even conservative. I doubt we will get as high as my original target (made at the beginning of the year) of 1400. That level would still not be excessive from a valuation standpoint, but there are simply too many macro-economic uncertainties to get there anytime soon.
Also, earnings estimates for next year are starting to fall, and the positive earnings surprises for the quarter do not seem to be doing anything to change that. I am still very worried about the pace of economic growth in the first half of next year after the payroll tax cut expires. That will result in a $1,000 reduction in take home pay for someone earning $50,000 a year. Discretionary spending is likely to take a big hit if that happens.
This, along with reduced help to the states and municipalities, could be enough to tip the economy back into recession. At least slow things enough that lots of people would be thinking about it.
Still, even if the estimates for 2012 earnings were to fall all the way to $100, from the current $106 (a big drop) by the end of the year. That would only put the forward P/E at that point at 13.25X if my target is hit. That is hardly a nosebleed valuation level, especially with the 10-year note at 2.39%.
