My mom always said if you keep playing this hard someone's going to get hurt.
I now feel my mom's in charge of this market. I feel this way because there are parts of this economy that are so good, so red hot, that if they don't cool, someone is going to get hurt, and I don't want it to be you.
Before I flesh out what's so good, I have to tell you how and why people get hurt so you don't freak out if -- not when -- but if it happens. For eight years from the end of the Great Recession, the Federal Reserve pretty much had one goal, which was to save the economy.
Then a couple of years ago the Fed figured out that it could start raising rates because the economy was able to get off of the respirator and start rehab. We left rehab after the election of President Trump and then last year we started walking.
We're not walking now. We are sprinting and it's dawning on investors that the Fed must keep raising rates so we don't run so fast that there are tremendous price increases and real life inflation which erode the purchasing power of the dollar and make it so your pension and your IRA and your 401k are worth a lot less than you think.
Now let's deal with the reality of the situation. The most important indicator of the heat of the economy is the Labor Department's non-farm labor report. The April numbers that we got the first week of May were decidedly soft, both in the number of people who were hired and the wage gains, which remain overall pretty meager.
That number's been the umbrella that has enabled this rally. It's given us the impetus to believe that the Fed isn't going to raise rates more aggressively than would be necessary -- necessary being the term of art that allows the Fed to continue to send up the Fed Funds Rate that it controls until the economy slows back to a jog. We've all been around long enough to know that if the Fed brakes too hard, as it did with 17 consecutive rate increases right into the Great Recession, then the economy will be thrown through the windshield. The analogy most people like to use is soft landing versus hard landing, but I like my more graphic exposition.
If the employment number was weak, what the heck is there to worry about? At 8:30 this morning we got employment claims data and the 4-week moving average of these numbers, the most perceptive way to analyze the data to eliminate the volatility, fell 2,750 to 213,250. Why is that number so important? Because it is the lowest claim figure since December 1969 when we had far fewer people in this country, 202 million versus 325 million. Inflation ran incredibly hot back then, much hotter than now, but the U.S. was running on a guns and butter economy as it was called, with the government borrowing to finance both the Vietnam war and the war on poverty.
Still, we have to be cognizant of that amazing statistic.
It's not only employment that's an issue. In the last few days we have heard from a number of retailers including Walmart (WMT) , Home Depot (HD) and JC Penney (JCP) Their message was very clear: April was seasonably weak because we had cold weather blanketing much of the country. One company after another was painstakingly clear that not only did the bad weather end with the month, but the good weather for retail started in May. I could give you the numbers one after another but I will let one of the best merchants in the land, Jane Elfers, CEO, Childrens Place (PLCE) , tell the story:
"Our ability to sell seasonal product in the first quarter was severely hampered by the combination of a record number of winter storms, and the unseasonably cold temperatures that persisted across our major markets. We generated comparable store sales of negative 1.8% in the first quarter versus a positive 6.1% in the first quarter of 2017. However when the weather improved across the country in the 13th week of the quarter, our sales turned aggressively positive. The strong sales momentum has continued and quarter-to-date we are currently running a positive 24%."
Twenty-four percent? That's insane. But it does dovetail, directionally, with what we are hearing from all the retailers. April was an outlier. May is real strong. Too strong.
Then there's an indicator I like more than pretty much any other: coated recycle board, meaning corrugated, the stuff that your Amazon Prime goods come in.
The producers are trying to put through a $50 a ton price increase for this commodity, the second so far this year. Why do I like this indicator so much? Because my late father sold linerboard for a living. He always knew when the price increases were coming and when we got one after another after another, as we did in 1987, it was a fabulous indicator that things had gotten out of control with the economy. It was just too hot. It was never wrong, so if we get a bunch of hikes you are going to know that the Fed will have to act more aggressively.
It's not just corrugated. Lumber's gone nuts. It's tripled since 2015 and its just plain parabolic now, pushed relentless higher by the NAFTA talks, or lack thereof.
Lumber goes into housing and the homebuilders are raising prices for homes because of a dearth of homes being built, mostly because zoning is much tougher on homebuilders. They can get away with it because inventory is so low but also because they want to pass on the raw costs that they have to deal with.
Then there is oil. We talk about it endlessly and we know the price can fluctuate. But it isn't fluctuating at all. It's just going straight up and that's a very big deal. It's playing havoc in the whole economic food chain now, given that so many products are made with a carbon feedstock. Gasoline's less of an issue and, remember we typically give oil a pass when it comes to inflation. But when it crosses $70 in the U.S. and $79 overseas you know that it can't be ignored.
Finally we have to consider that if the U.S. puts some very big tariffs on China they will raise prices across the board for lots of the items households buy. The inflation will be undeniable and palpable. Today the president had some very harsh words for China, the kind of words you don't utter unless you are very far apart in your conversations. It was anything but encouraging and the stock market took a huge intraday hit when the President gave the media a head's up that China's gotten away with way too much, calling them "very spoiled on trade."
Now, you might say, why not run for the hills with that set of facts? Who wants to risk being in with that kind of inflation? First, it doesn't have to end badly. The Fed can raise rates, the economy can slow gently and we don't need to go through the windshield. Second there are amazing anti-inflationary forces at work, namely the digitized economy which just puts endless pressure on prices.
If the Fed takes the Amazon (AMZN) factor, to use the shorthand, into account then the worries may be overblown. The internet is constantly displacing people so there's no real shortage of workers in major portions of the country. It matters and it keeps me from saying to you that it's time to raise a ton of cash.
Still, this economy is beginning to play too hard and we don't want my mother's admonition to come into play. Let's be cognizant that May's very strong so far and as it goes on we will begin to forget about that last weak employment number start to focus on a much stronger one.