Hello my friends. Today is November 8th and this is Markets Weekly. So this past week was a, you know, pretty down week in the stock market. We had a notable draw down, but at the end of the day, it looks like we tested and bounced off the 50-day moving average in the S&P 500, and we are in a time of the year where there's pretty positive seasonality. So, I wouldn't be too negative at the moment.

Now, last week would have been one of those big non-farm payrolls week where we got to figure out if the economy continues to create jobs. But because of the government shutdown, we got nothing. In fact, we didn't get the report before that. And if the shutdown continues, we might not get the next report either. So, we're all kind of flying blind.

Now, to be clear, sometimes the market cares about economic data, sometimes it doesn't. Sometimes good data is bad news, sometimes bad data is good news. But in any case, even though we don't have official data, there is a lot of other data we can look at. So today, let's first look at a range of alternative labor market data indicators and see what they're saying. And secondly, let's take a little look at the latest Fed financial stability report where they're basically saying there is an everything bubble. All right, starting with the labor market data.

Now of course the gold standard for labor market data as far as the market is concerned is the non-farmms pay perils report even though of course um jobs get revised away sometimes significantly the market usually cares most about that. Now after that though there are a lot of other indicators for jobs market data. The next most popular one is the jobs report put out by ADP.

ADP is a private payrolls processing company. So basically if you are a private company usually you hire someone to do your payroll for you. A big company in that sphere is ADP. So they process a lot of payroll for a lot of companies. So they have a pretty good sample size as to how the economy is doing. When it comes to jobs according to their latest report the economy created 40,000 jobs last month.

Well, that is you know a decent chunk and it also marks an improvement over the prior two months where we've even had uh negative growth. So the ADP is basically saying that the economy know first off the level of job growth 40,000 not huge but the ADP is saying that at the minimum job market is not getting worse over the past few months.

Now after the ADP we also have a smaller payroll processing company called Paychecks. Again, it's smaller than the ADP, but it's still a pretty good sample size. They put out these indexes both on job growth and on wages. And according to their data, they're saying that the job market, you know, it's it's slightly deteriorating, but not in a major way. So, their indexes are showing some decline. Looking at their wage data growth, it also seems like wages continue to decelerate.

Now, I want to be clear, if we have the NFP report, no one would be caring about this. And you know, usually people just laugh at these ADP reports, these private peer reports because they don't have a good relationship with the allimportant nonpartial report, but we don't have that. So, um, now these smaller, well, less usually less important reports, I get more airtime.

But these aren't the only data we get on the labor market. We can also look at other things such as the ISM surveys. Now what the ISM surveys do is that they go and ask companies how they're how how this month is compared to the last month and they'll say that it's better or worse or the same. So it's a diffusion index. It measures the where we're going not the level.

So even if everyone is saying that things are better this month than the last month it doesn't really tell you how much better. So it's more about a direction. Now one of the components of these ISM surveys is unemployment and according to these surveys below 50 is you're in contractionary ter uh territory. Uh the labor market basically continues as far as hiring goes continues to uh warp to worsen. Um it looks like it's not worsening at an accelerating rate but it's still it's not it's not positive. So, you know, it's not painting a a great picture of this.

Now, beyond that, we also have other measures. Uh, the Chicago Fed has a brand new labor market uh modelbased measure, and what they're saying is that it looks like the labor market has month-over-month just mildly, mildly slight degree of deterioration. Again, they're missing some of the inputs in this model, but I'm guessing that they have ways to make up for it. They're just showing basically very slight uh model based deterioration.

Now beyond that we also have unemployment claims. Now usually every week we would get the a release from the federal government about state level unemployment claims and people would watch to see whether or not increasing claims suggest a weakening in the labor market. Now, even as the federal government shut down, the state-based agencies still provide uh data on this and looking at the aggregation of this, it looks like on a state unemployment claims basis, it doesn't seem like there's deterioration. Basically, things are as it were beforehand. So, um that's good.

aggregation of this, it looks like on a state unemployment claims basis, it doesn't seem like there's deterioration. Basically, things are as it were beforehand. So, um that's good. Now, the last data point, again, there are many alternative data points. I'm just pointing to a number of them that that people have been talking about is data based on internal data from the Bank of America.

Now, Bank of America obviously giant bank. So, they do have a lot of data to look at and based on metrics created by their internal data, the labor market continues to, you know, basically be as it was in the past. So, not market deterioration but also not improvement as well.

So, taking a step back, looking at all these data indicators that we were talking about, it looks like the labor market basically is broadly unchanged. Over the past few months, we've we've been uh under the government shutdown, maybe some slight deterioration.

So, I think that uh that sounds reasonable. And based on that, it seems like Fed speakers are leaning more and more hawkish. Now, even though the market may or may not care about data, the Fed definitely does. And since we haven't had any market deterioration in the labor market, it looks like at the moment speakers at least there is a growing contingency are pushing back against a December rate cut.

Again, the market can still continues to price a better than even chance of us cutting in December. But it seems like the lack of deterioration in the labor market data is uh giving some Fed officials some courage to to say that we should just wait and see since we're flying blind. Let's just do things slowly.

All right, the next thing I want to talk about is the latest financial stability report from the Federal Reserve. Now, two times a year, the Fed puts out this financial stability report. Basically, they're just looking at a range of potential vulnerabilities in the financial system.

Now, one of the obvious ways to look at this is to look at asset price valuations because the thinking is when you have highly valued assets, it's more vulnerable to uh pullbacks, which of course could be could be dangerous. Now, the Fed looks at a range of asset prices and basically looking at all of them, they're suggesting that asset prices are elevated. Uh no surprise to any of you, of course.

Now, looking at equities and traditionally, you would look at something like a PE ratio. So how how much are investors paying out for our share earnings and looking at PE ratios historically speaking the Fed is finding that that measure is showing elevated valuations.

Another way to look at equities of course is to compare equities to fixed income seeing whether or not um equity investors are no paying a premium relative to fixed income and how much premium they're they're willing to pay. Now this equity risk premium of course is model dependent based on the model defend is using they're finding that out equities are historically elevated valuation.

and again I have to remind everyone that just because you're overvalued doesn't necessarily mean that it's going to go down. In fact uh you could look at this and say that it probably doesn't really matter because things that can get overvalued can get even more overvalued and things that are cheap can become even cheaper.

Now looking at other asset classes like corporate bonds and classic way to look at this is the spread. So how much extra return investors are demanding to invest in corporate bonds over treasuries. You can see that corporate bond spreads are pretty tight. So again that suggests that corporate bonds are richly valued looking at other asset classes but also looks at things like residential real estate.

And one way to value residential real estate from a model perspective is to compare house prices to rents. Again, uh based on this measure, the Fed is finding that yes, home prices are historically elevated. Of course, we already know that. Um and of course, looking at another asset class which I thought was pretty interesting was farmland.

Again, farmland has become popular as an alternative asset to invest in. And when you value farmland relative to income you can get from farmland, it also looks like farmland is uh historically historically elevated.

Moving on to commercial real estate. Fed is looking at commercial real estate prices relative to income it can generate relative to rents and it's also seeing that commercial real estate according to this metric is historically elevated.

So looking across the broad financial system, the Fed is thinking that yes, well Fed staff at least is saying that according to conventional valuation metrics, asset prices across uh basically everything are elevated. So I I suspect that maybe on the margins plays some role in in informing their policy decisions.

Whereas um if asset prices are so elevated that suggests some degree of loose financial conditions. So maybe monetary policy suggests that you know you're not being super restrictive. But then also note that the Fed is not going to conduct policy solely based on asset prices. If they think the labor market is in danger, they will cut. And even if that means that asset prices will become even more valued, so be it.

And you can't I mean, from their perspective, you're cutting rates to help people who are suffering from low employment. And if that makes a rich person even richer, that's not a good reason to to not help people who are suffering in the labor market. Uh so any case, that's all I prepared for today. And uh thanks so much for tuning in. Talk to you next week.