Dollars and Sense: Exuberant markets shrug off underemployment warnings

Markets still high. Now that we’re into June we can say May was the best month for U.S. investors since February. The Standard &Poor’s 500 rose 2.1 percent for the month, while the Dow rose 0.8 percent and the Nasdaq rose 3.1 percent. Though the Nasdaq has still not recovered to pre-tech bubble levels, the Dow and the S&P 500 continue to press into record territory.

The b-word. So does that mean we’ll start hearing the “b-word”—bubble? Before people start talking about a bubble, it’s important to remember that in an expanding economy, markets generally go up. I did a little exercise last week and discovered that if you go back 20 years, to June 1994, you find the Dow was at 3,634. Today it’s above 16,000. But that’s just an average 8 percent gain per year. If you measure peak-to-peak, the percentages drop significantly. The Dow was around 11,500 in January 2000. We’ve seen only 3 percent annual gains since then. So does that mean we’re not headed for a fall? I’m not saying that. That same 20-year period had two 25 percent corrections, and a half-dozen or so more 10 percent corrections. I would also note that the Dow has nearly tripled since February 2009, the low point of the financial crisis. So the past seven or eight years have been unusual. I’m just saying that what we’re seeing now is not without precedent. That said, a correction of as much as 10 to 15 percent would not be unusual either. I just can’t tell you exactly when that will happen.

Other news. Last week’s news continued mixed, though the trend was positive. The Institute for Supply Management (ISM) said its monthly index fell to 53.2 last month, down from 54.9 in April. Anything above 50 indicates expansion, but the new reading represents the lowest level since February. On the other hand, the ISM’s service-sector index rose to 56.3 in May from 55.2 in April. A number above 50 indicates expansion, and the bigger the number, the faster the expansion. The Bureau of Labor Statistics also said U.S. productivity in the first quarter fell by 3.2 percent, much more than earlier reports indicated. Overseas, at the monthly meeting of the European Central Bank, President Mario Draghi made the unprecedented move of cutting interest rates on deposits to below zero. That means the the ECB will now be charging the region’s banks to hold onto their reserves. The move is designed to encourage banks to lend money rather than hold it.

Unemployment. The unemployment number was the report everyone was waiting for last week. On Friday, the Bureau of Labor Statistics said the unemployment rate was unchanged at 6.3 percent. The good news is the economy created 217,000 non-farm jobs. That continues a positive trend. But the so-called U-6 rate, which includes underemployed or marginally employed workers, remains above 12 percent, and that’s not good. Still, the markets opened higher Friday on the news.

The week ahead. It will be a pretty quiet week for economic news, though on Thursday we’ll get two reports a lot of analysts notice—May retail sales and the Producer Price Index. As I’ve said so many times I feel like a broken record, retail sales still account for the majority of all economic activity, and the producer price index is an important inflation indicator. So traders will have a close eye on both these reports.