Friday, August 18, 2017

No Slowdown In The Growth Of e-Commerce Sales

It seems nearly every company reporting earnings now references a strategy to deal with Amazon (AMZN) due to Amazon's command of e-commerce sales. Beyond the simple delivery of packages and hard goods, AMZN is moving into many other areas like grocery, air transportation, etc. I discussed this in a post a few months ago. In that post I highlighted the profitability of Amazon's cloud business (AWS) and the company using AWS profits to fund growth in other industries.

Yesterday, the U.S. Census Bureau reported quarterly retail e-commerce sales for the second quarter of 2017. Not a surprise to many now, e-commerce sales continue to grow at a high rate, i.e., up 16.2% on a year over year basis for Q2. Traditional brick and mortar sales were up a small 2.9% year over year. The other notable highlight from the Census Bureau report, e-commerce sales now account for 8.9% of total retail sales. This is nearly three times larger than ten years ago.

Finally, due to the success of e-commerce broadly, many of the related stocks have been pushed to valuation levels far above the market's valuation. As the below chart shows a quick price run up can just as quickly turn in to a price decline. Are these e-commerce equities setting up investors for disappointment?

Certainly, valuations can become more stretched and these stocks can move higher for an extended period of time; however, investors with outsized positions in this industry should evaluate their overall exposure relative to their entire investment portfolio.

The Economy May Not Be At Full Employment

One economic conundrum has been the sub-par growth rate in average hourly earnings in spite of what appears to be an economy operating at full employment. In a fully employed economic environment, wages generally see fairly strong upside pressure and this becomes a concern with the Federal Reserve due to the upward pressure placed on the inflation rate. As the below chart does show, average hourly wages have grown at about a 2% annual rate since the end of the financial crisis. Prior to the onset of the last recession, wage growth was in the range of 3% to 4%. From a positive perspective though, wages have been growing faster than the rate of inflation for most of the last four years. Additionally, the differential wage growth and inflation in this cycle is on par with prior economic expansions.

The below chart shows the current unemployment rate is 4.3% and at a level reached prior to the 2008/2009 recession. Also included in the below chart (orange line) is the unemployment rate if the participation rate was equal to the participation rate prior to the 2008/2009 recession. The participation rate in March 2008 equaled 66.1% versus the current rate of 62.9%. At a 66.1% participation rate, the current unemployment rate would equal 9.0%. What this means in absolute terms is an additional 13 million people would be counted in the labor force, but unemployed.

Some economic strategist will say the 13 million person increase in the "not in labor force" figure is largely a result of baby boomer retirements. On the other hand, with such a low unemployment rate, one might ask why Amazon's (AMZN) recent national hiring day across twelve locations drew such long lines.

Certainly, given the reported unemployment rate of 4.3%, history would suggest wage growth should be more in the 4% range. However, if the participation should be higher and nearer the pre-financial crisis level, maybe the real unemployment rate is closer to 9% than the reported 4.3% rate and the current wage growth rate is in line with historical figures.

Interestingly, in a wage growth report released earlier this week by the San Francisco Federal Reserve Bank, references were made to workers being pulled back into the labor force. Also noted in the report was the fact newer job entrants put downward pressure on wage growth to the tune of about 2%.

And finally, I continue to evaluate the participation rate of the various employment age groups and the only group showing a participation rate higher than the pre-financial crisis participation rate is the 55 and over group. As the below chart shows, all other groups continue to show slack from a participation rate perspective.

In our view the unemployment rate is likely higher than the reported 4.3% given real demand examples like the Amazon National Hiring Day. Positively, wages are growing faster than inflation; however, the employment market is likely not as strong as it could be. However, this suggests additional employment growth can occur and provide further tailwind for economic growth going forward.

Sunday, August 06, 2017

Investor Fund Flows Favoring Bonds And Not Equities

The equity market has gone over a year without a pullback of at least 5% or more. The last 5% decline occurred in mid-June 2016 when, over a two week period, the market fell 5.5%. Even in the run up to the election last year, the equity market did not close down over 5%. This lack of volatility is showing up in popular volatility measures like the VIX, but the VIX may not be a good measure of expected future volatility.  Also, this lower level of volatility has some strategists suggesting investor's have become to complacent about the equity market and have willingly taken on more equity exposure as a result.

A recent post by Dr. Ed Yardeni, Ph.D., and he puts out some great research, noted individual investors may have become too optimistic as well. In that post, Investors Hearing Call of the Wild, he included the below chart of U.S. equity ETF flows.

Fortunately, he does note in the post that 'some' of these ETF flows may have come from investors allocating dollars out of mutual funds. In fact ICI reports the total flow into U.S equities over the 12-month period ending in June is only $7.6 billion and not simply the $236.2 billion that flowed into ETFs. Nearly all of the equity flow came out of actively managed mutual funds. I do sense that investors going the passive route may be in for a surprise in the next market correction.

And finally, it should be noted that since the election last year, investors have placed more investment dollars into bond funds then stock funds. Additionally, over the course of the last five weeks ending July 26, 2017, investors have pulled $21.7 billion out of U.S. stock funds while world funds collected $28.3 billion. But still, bond funds have been the net favorite as flows total $36 billion over this same five week period.

In conclusion, as the file in the just noted link above shows, nearly three times as many dollars have flowed into bond funds versus stocks funds since the beginning of 2015. Maybe the potential bubble is in bonds and not stocks.

Saturday, August 05, 2017

The S&P 500 Index Is Expensive And Has Mostly Been So Since The Early 1990's

One can cite any number of stock valuation measures and conclude U.S. equities look expensive or are at least trading above their long term average valuation measures. In this environment one might conclude stocks are priced for perfection with little margin for error. Of course this might certainly be the case, but is this an uncommon position for the equity market? As the shaded areas in the below chart show, investors would have had a difficult time buying or holding onto stocks at valuation levels that were below their long term average valuation since the early 1990s.

Tuesday, August 01, 2017

Dividend Payers Are Underperforming

A year ago dividend paying stocks were significantly outperforming the non payers in the S&P 500 Index and the S&P 500 Index itself. If investors were chasing performance back then and loading up on the payers, today they would be disappointed. Below is a chart of the year to date performance of two dividend paying exchange traded funds, SPDR Dividend ETF (SDY) and iShares Select Dividend ETF (DVY). The return of the dividend focused ETFs is nearly half that of the S&P 500 Index.  The return difference is similar for one year. My year ago post contains some details on both ETFs.

Below is S&P Dow Jones Indices' average return summary for the payers and non-payers in the S&P 500 Index as of July 31. The return difference is not as large as noted above due to ETF construction differences, for example, not using all 420 dividend paying stocks in the S&P 500 Index.

The fact the dividend payers are underperforming the non-payers as well as the broader S&P 500 Index itself, seems to be further confirmation of investors seeming to favor growth oriented stocks over value ones.