Profits Over Prosperity
Economic data is sometimes confusing and often contradictory. Consider these two bits of information. Earnings at S&P 500 companies have jumped 23% since the fourth quarter of 2007. Over the same period, sales at the same companies declined by 9%. In other words, business got worse but profits still rose. How can this be? The missing piece is productivity. Businesses have enhanced their bottom line by slashing costs.
Unfortunately for many people, payroll is one of the costs being slashed. Profits are rising because companies are getting more output for each hour of human labor. The result is a strangely inconsistent economy in which unemployment stays stubbornly high but stockholders and corporate executives prosper. In theory, rising productivity is good for everyone in the long run. Profits will be plowed back into new ventures that create more jobs. The time lag between these steps is frustrating; for now, prosperity is back for some but not others.
Matters could always be worse, of course, and we are appropriately grateful in this Thanksgiving week. Retailers are gearing up for the traditional Black Friday sales push. To some degree, this is an exercise in mass perception-changing. Consumers have learned that prices will get even better as year-end approaches, so they must be enticed into stores with unbelievable bargains. Retail marketers use Black Friday to put people in a buying mood. Their success (or lack thereof) will be measured in real-time as Friday’s sales figures are divulged. However, the real measure of success will be if consumer spending increases are sustained through the end of the year.
The U.S. economy, as measured by Gross Domestic Product, grew at a 2.5% annual rate in the third quarter. This may keep employment rates steady and build a little optimism, but it in no way qualifies as “recovery.” Years of easy credit can be squeezed out of the system only with time. Nonetheless, the process is underway, and for this we are thankful. Best wishes to all.
Utilities and Financials both entered intermediate-term downtrends and remain at or near the bottom of the pile this week. At the other end of the scale, the relative order was unchanged. Energy, Materials, and Consumer Discretionary are still the places to be along with Technology. The biggest change for the week came in Financials, which lost momentum as the European sovereign-debt crisis flared up in Ireland.
The order of the Style categories did not change one bit since our last report. Small Growth is still on top, and Large Value is still on the bottom. The recent compression between the best and worst categories reversed itself. Last week the best Style category was 17 RSM points ahead of the worst. This week, with Small Growth at 38 and Large Value at 10, the difference is 28 points. This suggests that demand for risk assets is on the increase – a trend that bears watching.
We have a new triumvirate in place at the top of the Global Edge chart. The U.S., Canada, and Japan are in a three-way tie for first place. Japan was, you may recall, the lowest-ranked world market for a long time and was second-to-last as recently as a week ago. Now there is an outside chance it could move into an undisputed lead within days. The U.K. benchmark made a similar journey in the other direction, dropping from the #2 spot last week all the way to #8 in today’s ranking. If these moves are sustained, they will represent a major change in worldwide relative strength.
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
“When the productivity growth comes, then watch out because that is when companies start not needing so much labor. “
Edmund Phelps, Columbia University economist and Nobel laureate (Nov. 2010)
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