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Did President Barack Obama just win re-election on Friday?
Well, no, of course not. But the addition of 227,000 jobs in February, combined with modest upward revisions in the ranks of the employed over the prior two months, certainly places Obama on the path to a second term, if we are to believe that the economic and stock-market trajectory dictate electoral destiny.
With the new data, the 12-month average net job growth of a bit over 110,000 almost precisely matched the level in late 2004, when George W. Bush was about to be awarded a second term, according to the running tally kept by Michael Shaoul of Oscar Gruss & Son.
This mark of economic progress, admittedly from a much more dire starting point this year, comes as we have reached the third anniversary of the last panic-freighted low in the U.S. stock market on March 9, 2009, when the Standard & Poor's 500 closed at 676, just under half the level at which it ended Friday. In the prior presidential cycle, of course, the equity market also roughly doubled from its low early in Bush's first term to the ultimate high in late 2007.
The folks at Strategas Research Partners offer a handy then-versus-now comparison of major financial-market touchstones of today against March 9, 2009 (see table, A Study in Contrasts, in The Trader). Crude-oil prices are up 127%, the market value of the S&P 500 is up 110%, gold is 85% to the better, and the Federal Reserve's balance sheet and U.S. government debt are both heftier by about the same percentage, 42%-43%.
Interestingly, even after doubling in value, the U.S. stock market is at roughly the same valuation, relative to trailing corporate earnings as it was three years ago, a good reminder of how this economic recovery has disproportionately benefited the corporate sector. Of course, corporate profit margins are now at historical highs, and the overall market P/E is flattered by the overly cheap mega-cap stocks that dominate the indexes.
Another gauge of how the environment has transferred wealth to the corporate sector: Corporate-bond spreads over Treasuries have collapsed by 66%, to 2.02 percentage points from 5.97. No wonder corporate issuers priced $40 billion in new debt deals last week.
Throw it all in a blender and it would seem the economic variables that tend to tilt the electoral scales right now favor the incumbent, all else being equal, and even though no postwar president has won a second term with unemployment as high as it is now.
Of course, this doesn't mean all is well with the world or that the stock market will continue rewarding share owners. For one thing, a year ago the economy was producing jobs at a pace similar to today's, and then the momentum was thwarted by higher oil prices (again, similar to today's) and the European credit scare. The fact that stocks managed only a tepid rally after the employment numbers were released suggests that there's a bit of unfinished business in terms of a corrective pullback yet to be done.
One thing to throw onto the monitor is whether the employment data mean that the Federal Reserve will at least need to make gestures toward halting its ultra-easy stance a bit earlier than forecast.
It's worth noting that throughout history, no matter the politics involved, stocks have done best in the latter part of an election year when the incumbent wins. Apparently, when the world seems comfortable enough that more than 50% of the country sees no need to fire its chief executive, the aggregate equity value of Corporate America tends to benefit.
MAYBE IT'S A LAGGING INDICATOR, perhaps a sign of some structural change in investor behavior, but the way that the public has failed to embrace a stock market that's up just about 20% in five months, and continues to cringe in anticipation of further nastiness to come, is worthy of attention.
According to EPFR Global fund trackers, "retail investors remain unimpressed with the Dow Jones' foray above 13,000," with net inflows to domestic-stock mutual funds below $1 billion this year. In comparison, the comprehensive Wilshire 5000 Index has added $1.5 trillion in value this year.
Meanwhile, the assets entrusted to the iPath S&P 500 VIX Short-Term Futures exchange-traded note (ticker: VXX) has increased by $746 million, or 94%, this year, to $1.54 billion. This is a fund that increases in value along with the price of implied market volatility, known more colloquially as disaster insurance. So, about three-quarters as much net cash has found its way to a fund that profits from spikes in U.S. market volatility as has been sent to funds that attempt to profit from rising equity-market values.
It's surely true that the public is not always and everywhere misguided in its investment decisions. But what are the chances that so many average folks have somehow correctly positioned for a major market top in this fashion?
E-mail: michael.santoli@barrons.com
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