The following is an excerpt from Zacks Chief Strategist John Blank’s full Sep Market Strategy report To access the full PDF, click here
In recent U.S. macro data, I noted two very important U.S. business cycle points.
First, one of the biggest sources of support for the S&P 500 -- now trading at a lofty forward 12-month P/E ratio of 17.5 -- is the paltry return coming from risk-free U.S. Treasuries. That latest P/E ratio is well above the 5-year average (15.5) and even further above the 10-year average of 14.1.
The logic: An investor sitting on a pile of cash cannot make more than 3% by holding U.S. 10-yr Treasuries in 2015 and 2016. And it is looking to get much, much worse for these risk-averse types in 2017, 2018 and 2019, as the Fed raises short-term rates.
Here’s the latest forecast—
During 2015 and 2016, the S&P 500 made annual returns of +1.4% and +12%. Even counting the lousy year of 2015, an investor averages +6.5% returns on a plain vanilla S&P 500 index fund each year. YTD for 2017 is showing the S&P 500 up +11.3%.
What’s my first point? Stocks are going to be the only place to be for another 2 years, or until the U.S. sees an actual downturn in output, ending this expansion.
The second point I want to make comes NOT from the U.S. unemployment rate.
That data is benignly quoted in news as frictional at 4.4%. However, take a look at what is called the DURATION OF UNEMPLOYMENT.
In the past 10 business cycles, going from 1950 to 2010, you can see. The average duration of unemployment never got higher than 20 weeks during the worst period of ANY recession. What of today? After nearly 9 years, it still stands at 25 weeks!
What’s my second point? The duration of unemployment data is a ‘tell.’
This U.S. economy is not producing enough jobs yet to really get labor demand moving. No wonder the wage inflation rate is not moving up much. That tells us. The call for any hikes by the U.S. Fed are likely to be watered down, not lifted. In any event, this second set of macro data implies this long business cycle needs to get longer still.
Zacks September Sector/Industry/Company Telescope
There are some notable upgrades and downgrades, as covering earnings analysts transition into the Fall reporting season.
The clearest sector leader is the Consumer Discretionary sector, with its multiple strong industry players. Surprisingly, the other clear leader came from the Telco sector, which is usually a defensive area.
Industrials stayed at Attractive, as did Health Care (look at Medical Care only), Consumer Staples, and Info Tech (with the usual strong performer in Semis). The Market Weight sectors are Energy, Financials, Materials, and Utilities.
Interestingly, there are no Very Unattractive sectors in this S&P 500 framework.
(1) Consumer Discretionary is Very Attractive. The many leaders include Publishing, Autos-Tires-Trucks, Home Furnishings-Appliances, and Consumer Electronics.
Top Zacks #1 Rank Pick: Movado Group (MOV - Free Report)
Movado Group is a designer, manufacturer and distributor of quality watches with prominent brands sold in almost every price category comprising the watch industry. The company's watch brands include Movado, Concord, and ESQ.
(2) Telcos rise to a Very Attractive sector. Leadership comes from Utility-Telephone and Telco Services.
Top Zacks #1 Rank Pick: China Telecom Group (CHA - Free Report) ).
China Telecom is a state-owned telecommunications company in China. They operate local telephone networks in ten provinces in China.
(3) Industrials are Attractive. The leaders are Machinery, Aerospace & Defense, and Railroads.
Top Zacks #1 Rank Pick: Komatsu (KMTUY - Free Report)
Komatsu, headquartered in Tokyo, Japan, is the world's second largest manufacturer of earthmoving and construction machines, with annual revenues of 7,580 million euros (9.2 billion US$) and more than 30.000 employees worldwide.
(4) Info Tech is Attractive. The leader (not surprisingly) is the semiconductor group.
(5) Health Care is now an Attractive sector. The industry leader is Medical Care.
(6) Consumer Staples are Attractive. Leaders are Beverages, and Soaps & Cosmetics.
(7) Energy gets back to a Market Weight. The leader is Coal, a Trump supported pick.
(8) Financials are a Market Weight. One industry looks great. It is the Major Banks.
(9) Materials fall back to a Market Weight. Company leaders are found in Chemicals.
(10) Utilities are a Market Weight.