ETF Trends
ETF Trends

By Hafeez Esmail, Main Management Chief Compliance Officer

Political spin has long been a hallmark of presidential campaigns. Historically, both parties have sought to craft the truth in a manner most favorable to their given agenda.

However, the 2016 election may have taken this traditionally nuanced exercise to a far more blatant level. Perhaps this was only to be expected in an election between two of the least trusted candidates to ever run for office.

Ultimately though, the question for most is whether rhetoric about the economy is closer to a “disaster” or is this mere hyperbole and are there enough positive signs to warrant raising rates in order to manage a growing economy? The inputs that Main Management tracks on an ongoing basis may shed light on this question from a number of different angles.

Overall, from a global perspective, the near term picture appears encouraging. Manufacturing PMIs for the US, Eurozone, BRIC countries (Brazil, Russia, India and China) as well as globally (as represented by JP Morgan Global Manufacturing PMI) are all showing a distinctly positive trend line over the past 6 months. The US Manufacturing number was the highest in a year, Eurozone the highest in 34 months and the JP Morgan Global registered a 27-month peak.

manufacturing-pmi

While Manufacturing is an important indicator, the Service sector is certainly a more critical component of both US GDP as well as equity markets.  Service PMIs have also exhibited strong momentum over the past 6 months across US (54.6), Eurozone (53.8), JP Morgan Global Services PMI (53.3) with only BRIC nations with a reading under 50, indicating contraction.  India created a drag for the BRIC nations, with Services falling firmly into contracting territory for the first time since January 2015.

service-pmis

Honing in on the domestic picture, November’s Jobs Report showed the economy added 178,000 new jobs, which slightly exceeded estimates.  The unemployment rate dropped to 4.6% which is getting closer to pre-2008 recession levels.  However, this was at least in part due to the increase of those not in the labor force which jumped by 446,000.

Put another way, there was a decline in the labor force participation rate by 446,000 people.  As a result, the overall participation rate dropped to 62.7% while the rate for the 25 to 54 year old age group dipped to 81.4%.  In general, people leave the labor force when they are discouraged about job prospects, hence this is normally not a positive sign, even though it results in an improvement in the unemployment rate.

labor-force-participation-rate

Population-adjusted unemployment claims are near their lowest levels since the late 1960s.  They briefly dipped to their lowest level since the data has been recorded in September, before rising slightly in October and November.

However, Average Hourly Earnings was another blip on the radar of an otherwise generally upbeat jobs report as they declined from a 2.8% year over year (Y/Y) rise in October, to 2.5% Y/Y in November.  That said, the overall upward trend for 2016 continues, suggesting that inflation may slowly be coming into play.  This may finally convince the Fed to raise interest rates in December.

average-hourly-earnings

Some of the unemployment numbers may not be as rosy as they appear, given that underemployment is a factor that doesn’t appear in the numbers.  The fact that workers who are seeking full time jobs but taking part time work, or continue to accept positions for which they are overqualified, is an ongoing concern.  That said, with the Fed on the brink of an interest rate hike, the outlook is certainly closer to optimism than it is to despair.

Hafeez Esmail is the Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.

A pioneer in managing all-ETF portfolios, Main Management LLC is committed to delivering liquid, transparent and cost-effective investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency. http://www.mainmgt.com