Global Equity Valuations, BABA, US Wage GrowthBy admin_45 in Blog
#1: October’s US state- and city-level unemployment data continues to show stark regional differences in the American labor market.
- October’s US national unemployment rate was 4.6 percent.
- 20 states had less than 4 percent joblessness last month, ranging from Nebraska’s 1.9 pct to Iowa, Kansas, and South Carolina at 3.9 percent. A few other states in this cohort worth noting: Georgia (3.1 percent), Wisconsin (3.2 pct), Indiana (3.3 pct), Minnesota (3.5 pct) and Virginia (3.6 pct).
- A further 7 states saw between 4.0 and 4.6 percent joblessness in October, including Tennessee (4.2 pct) and Florida (4.6 pct).
- Another 14 states are running between 4.6 pct (the national level) and 6.0 pct unemployment including Ohio (5.1 pct), Massachusetts (5.3 pct), Texas (5.4 pct), Illinois and Pennsylvania (both 6.0 pct).
- And then there are 9 states with +6.0 percent unemployment, including high population areas such as Michigan (6.1 pct), New York (6.9 pct), New Jersey (7.0 pct) and California (7.3 pct).
That’s quite a remarkable range of outcomes, from Nebraska’s 1.9 percent to California’s 7.3 pct, and as we’ve been chronicling for over a year now the difference comes down to large urban centers. For example:
- New York City: 9.4 percent in October 2021
- Los Angeles: 7.8 percent unemployment
- Chicago: 5.4 percent unemployment
Put another way, NYC’s unemployment rate right now is where the national joblessness rate was 15 months ago, in July/August 2020 (8.4 – 10.2 pct). LA’s unemployment rate is a little better, but it’s still only where the US economy was 13 months ago (7.8 pct in September 2020). And Chicago’s 5.4 percent might look close to normal, but it is still 4 months behind the US labor market recovery (July 2021 national unemployment at the same level).
Takeaway: US urban labor markets have lagged, and continue to lag, the national jobs recovery. As workers return to offices in these areas and require incremental services (primarily leisure and hospitality), conditions should continue to improve. It’s just taking a long, long time to get there.
#2: Where are the cheapest equity markets around the world? Let’s take a look:
We know they are not in the US ... The S&P 500 trades for 21.4x next year’s Wall Street analysts’ EPS estimate ($220/share). The Russell 2000 trades for 27.5x, so also not cheap.
But … The S&P Small Cap 600 does trade for a more reasonable sounding 15.4x next year’s earnings numbers. The difference between this index and the Russell is that S&P only admits profitable companies; approximately a third of the Russell 2000 is unprofitable, and that skews valuations.
The MSCI EAFE (non-US developed economies) Index is currently valued at 15.5x 1-year forward earnings estimates, very close to the S&P 600.
- Japan, with a 23 percent weighting in EAFE, trades for 14.9x.
- The other 2 heavyweight country allocations, the UK (14 percent) and France (12 pct), have valuations of 12.1x and 16.2x respectively.
MSCI Emerging Markets is the cheapest major regional index, at 12.7x next year’s expected earnings.
- China has the largest weighting (34 percent), and that country’s forward PE valuation is 12.8x.
- The other major countries in EM are Taiwan (15 pct weight) with a 14.8x valuation, South Korea (12 pct weight) with a 10.4x multiple, and India (12pct) with a 23.7x multiple (not a typo).
In short, what we have here is a global equity market that trades for a very old-school 13-16x twelve-month forward earnings estimates, with two exceptions: the S&P 500 (21x) and the Russell 2000 (27.5x). We can asterisk the latter due to its heavy exposure to unprofitable companies. The S&P 500’s lofty valuation comes down to:
- Its proven ability to beat consensus earnings expectations and 2022 earnings estimates that are still too low in our view ($222/share currently, $240/share is our base case).
- The largest weighting of Technology stocks, with 29 percent in “Tech” and another 13 pct in Amazon, Google, Tesla, and Facebook.
- MSCI EAFE is only 10 percent Technology (and no Tech-adjacent names).
- MSCI Emerging Markets is 21 percent Technology, and another 12 percent Tech-adjacent, but too much of these exposures are China-specific to be comparable to an Amazon or Google, for example.
Takeaway: as the old saying goes, “sometimes cheap is expensive”, meaning that the most affordable option may cost more in the long run. Such is the case, we believe, with global equity markets. The S&P 500 started the year relatively expensive and has only gotten more so; it has rallied 25 percent versus +9 pct for MSCI EAFE and an outright loss of -2 percent for MSCI Emerging Markets. As we exit 2021 and look forward to 2022, we see no reason to alter our most long-held recommendation since starting DataTrek: US large caps are the place to be.
#3: Apropos of the last section’s message, we want to make sure you’ve been watching Chinese Big Tech company Alibaba, because it’s been making 1-year lows this week. In fact, at $133/share, BABA is back to levels last seen during the global equity market meltdown in late 2018. Regular readers know how we feel about new multi-year lows: we always worry there’s more bad news (and stock price action) coming down the road. That’s exactly what we see in the BABA chart.
Takeaway: BABA is 3 percent of MSCI Emerging Markets, 10 pct of MSCI China, and (as if that weren’t enough) an important tent-pole stock for Chinese Technology valuations. Imagine what you’d think if Apple and Amazon were making multi-year lows, because their combined weighting is the same as Alibaba’s weight in MSCI China. Our bottom line is that BABA’s price action shows markets have not yet fully discounted the effect of the Chinese government’s regulatory crackdown. We remain cautious on Chinese equities and recommend underweighting China in EM-focused portfolios.
By Jessica Rabe
Are wages in the US going up at least in part because so many workers are quitting their jobs? People don’t tend to leave their current position without first accepting a better paying offer, after all.
Not only is the answer “Yes”, but the gap in wage growth between job switchers and stayers has been widening over the past few months. That’s according to the Atlanta Fed’s Wage Growth Tracker, which combines BLS data with information from the Census Bureau. Three points here:
- The 12-month moving average of median wage growth based on hourly data was up 4.3 pct for job switchers versus just 3.2 pct for job stayers as of last month.
- Job switchers’ wage growth nearly matches the last cycle’s high of 4.4 pct in February 2020, Conversely, job stayers’ wage growth is down from its prior cycle peak of 3.5 pct in June 2019 and has failed to recover lost ground from the pandemic.
- The gap in wage growth between job switchers and stayers is currently 1.1 points, which is exactly one standard deviation above the average of 0.7 points back to the start of the series in 1997. This is a very different dynamic from after the last crisis, when this disparity reached an all-time low of -0.7 points in early 2010; workers were much less in demand after the Great Recession.
Takeaway: the current post-crisis recovery is unlike any the US has previously experienced, in that there is a shortage of labor rather than demand for goods and services. As Americans have reimagined how and where they want to work in a post-pandemic world, they continue to take advantage of new opportunities amid near-record job openings. Employers are having to respond as a result especially with such high worker turnover, including raising wages to attract new talent in an extremely competitive environment for labor.
As for which industries are driving wage growth, there are two standouts and one surprising laggard. Three points here (data is again measured by the 12-month moving average of median wage growth):
#1: Leisure and hospitality: Wage growth in this industry seldom exceeds overall wages as the chart below back to 1997 shows. The only times wage growth in leisure and hospitality has surpassed overall readings in the last two decades were in 2016 and the end of 2019/early 2020, soon before the pandemic hit. Wage growth in leisure and hospitality has outpaced the broader economy since August, holding steady at a rate of 3.9 pct versus 3.5/3.6 pct. It also still has room to run as compared to the prior cycle high of 4.1 pct wage growth in early 2020 right before lockdowns.
The takeaway here is that leisure and hospitality has significantly lagged overall wage growth historically but is catching up in a hurry now. It also accounts for a fifth of overall quits this year. It should therefore keep experiencing greater wage pressures as it plays catchup and tries to attract workers amid high turnover. Leisure and hospitality makes up 10 pct of total US nonfarm payrolls, so it should pull overall wage growth higher as it continues to heat up.
#2: Trade and transportation: This industry has historically kept pace or even surpassed (2010-2013 and 2015-2018) overall wage growth. Most recently, it’s beaten overall wage growth every month this year, holding steady at 3.7 pct.
The takeaway here is that wage growth in trade and transportation could accelerate further, as the prior cycle high was 4.0 pct in the Summer of 2017. This industry accounts for nearly a fifth of total nonfarm payrolls and faces labor shortages. Wage growth should therefore continue to pull overall wage growth higher, especially amid such strong consumer demand.
#3: Education and health: Wage growth in this industry has dramatically lagged the broader US economy since 2011, and the latest recovery is no exception. Wage growth here is currently +3.3 pct versus the overall rate of 3.6 pct.
The takeaway here is that there has been a structural shift in wage growth in this industry, which accounts for 16 pct of total nonfarm payrolls. Prior to 2011, wage growth in education and health mostly outpaced the broader US economy from 2002-early 2011. Since then, the opposite is true. So even though this industry is responsible for 14 pct of overall quits this year, this is one environment with a huge demand for labor and high employee turnover that is not meaningfully translating into higher wages.
Lastly, we’ll end with an important demographic when it comes to driving longer-term trends in overall pay. Wage growth for high school workers (4.0 percent as of October) has bested the overall economy (3.6 percent) and those with a bachelor’s degree (3.4 percent) this entire year. Since 1997, wage growth for higher educated workers has almost always exceeded the broader economy and less educated workers. We view this new trend favorably as it should help participation rates by pulling lower skilled workers back into the labor force more quickly.
Pulling this all together: wage growth is picking up much more quickly in important industries and demographics than is typical this early on in an economic recovery. This is a worker’s jobs market and we do not see ongoing labor dynamics – high turnover and incentives to quit – changing anytime soon. That will continue to put upward pressure on overall wages.