December Employment Update: Growth Outlook Remains, S&P 500 Valuation Rich

Economic Composite

I updated my economic composite to reflect the release of the U.S. Labor Department’s employment report on January 9. The report showed a rise in nonfarm employment of 148,000 in December. Forecasters were looking for a gain of 191,000, according to Bloomberg News.

Preliminary numbers for the previous two months were revised slightly downward. For the year, nonfarm employment grew on average a robust 171,000 per month.

Temp employment in December rose 7,000 (+0.2%) from the previous month and climbed 4.6% year over year. The preliminary figures for October and November were adjusted downward by a few thousand.

For the year, temp employment rose on average a solid 11,000 per month, for an average increase of 4%. It’s an encouraging sign that employers, in the aggregate, are seeing enough strength in their business to hire temps at this pace.

The December level of temps was in line with my estimate, so I’m leaving my estimates unchanged. I continue to forecast modest monthly sequential increases in the BLS temps data series, equating to low to mid single-digit annual growth rates. As a result, the composite continues to signal economic growth for the next 12 to 18 months. The composite is likely to range from 2.0 to nearly 3.5 through this year, well into positive territory. I do not expect the economy to tip into recession.

The next Employment Situation report is scheduled to be released on Friday, February 2. I expect to provide an update to the economic composite shortly after the report comes out.

Figure 1 below shows the actual monthly values of the economic composite from 1991 through the present and the estimated values through nearly the end of 2019. In general, the composite remains positive during periods of economic expansion and turns negative during periods of recession. The vertical dashed lines mark the inflection points when the economy is poised to enter recession or has safely exited recession. It typically takes three consecutive months of a change in sign (from positive to negative and vice versa) to confirm a change in outlook.

Valuation Composite

My composite of publicly available forward P/E estimates puts the current forward P/E on the S&P at the intraday trade of 2,735 (Friday, January 5) at 20.5.

The S&P has climbed 11% in the four months since I made the change from “high end of fair value” to “fairly valued” on August 30, in my article on the second-quarter staffing data from the American Staffing Association.

In that time, the composite P/E has expanded 10% from 18.6 to 20.5. The last time it was this high was April, 2002. It’s hard to see much more P/E expansion in the near future. That leaves an increase in the S&P earnings estimate to power the market higher. It’s my sense that one of the components of my composite P/E, an input I’ve been tracking for well over a decade, is still one month away from advancing its four-quarter earnings estimate by one quarter.

Thus, I’m returning to high end of fair value. I have concerns the market is vulnerable to shocks at this level.

I prefer to be a more aggressive buyer at a lower P/E, perhaps around 18.0, which would equate to roughly 2,400 on the S&P. For now, I would still continue to make regularly planned dollar-cost averaging allocations to equities that investors intend to hold for the long term, such as monthly or bi-weekly contributions to a 401(K) plan.

A five-year chart of the valuation composite and the S&P 500 is below. The last two months have seen a considerable climb in the S&P and the P/E composite.

Track Record

The model’s historical record is depicted in the chart below. The economic composite predicted the beginning and end of the 2000 recession and the 2008 recession. It also predicted the end of the recession of the early 1990s. Some of the data series used in the composite did not exist before 1990; hence, the start of the track record at that time.

In the two historical Overweight periods, the S&P rose 13% and 14% on an annualized basis. In the two historical Underweight periods, the S&P fell 18% and 9% on an annualized basis. In the current Overweight period, the S&P has been returning 12% annually.


For a full discussion of the Chartwell method, I refer readers to a description of the process in my April employment update, under the heading “Methodology.”

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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