Labor force participation rate, plus loan standards, 5-step stock framework, the Buffet indicator, and work-life balance
Labor force participation rate, plus loan standards, 5-step stock framework, the Buffet indicator, and work-life balance
The Sandbox Daily (5.9.2023)
Welcome, Sandbox friends.
Today’s Daily discusses:
labor force participation rate for key cohort climbs to 15 year high
Fed says loan standards continue to tighten
how to select stocks using a simple 5-step framework
the Buffett indicator
work-life balance
Let’s dig in.
Markets in review
EQUITIES: Dow -0.17% | Russell 2000 -0.27% | S&P 500 -0.46% | Nasdaq 100 -0.68%
FIXED INCOME: Barclays Agg Bond -0.09% | High Yield -0.25% | 2yr UST 4.026% | 10yr UST 3.522%
COMMODITIES: Brent Crude +0.35% to $77.28/barrel. Gold +0.48% to $2,042.9/oz.
BITCOIN: +1.41% to $27,677
US DOLLAR INDEX: +0.26% to 101.637
CBOE EQUITY PUT/CALL RATIO: 0.73
VIX: +4.30% to 17.71
Quote of the day
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
- Benjamin Graham
Labor force participation rate for key age cohort is strongest in 15 years
The labor force participation rate (LFPR) for the “prime-age” cohort is the strongest in 15 years, which should act to slow wage growth in the future.
While the overall LFPR held steady at 62.6%, the closely watched prime-age LFPR – working individuals aged 25-54 year-olds – ticked up to 83.3%. This means the prime-age LFPR is now above its pre-pandemic level and the highest since March 2008.
Source: White House Council of Economic Advisers
Fed SLOOS report shows bank lending continues to tighten
The Federal Reserve released its quarterly Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices yesterday and it continues to show banks are tightening lending standards on commercial and industrial (C&I) loans.
Loan standards are now nearly the tightest since at least the 2008 Global Financial Crisis, outmatched only by the onset of the pandemic. The proportion of U.S. banks tightening terms on C&I loans for medium and large businesses rose to 46%, up from 44.8% in the Q4 of 2022.
C&I loans are an important funding source for companies that can’t access capital markets to fund growth initiatives or to just help pay the bills and service existing debt. C&I loans are an especially important funding source for lower-rated companies because borrowing (or issuing additional equity shares) can be too restrictive and costs prohibitive at times, whereas C&I loans are short-term loans with variable interest rates that are generally secured by company collateral.
This report only covers the first quarter, when only Silicon Valley Bank (March 10) and Signature Bank (March 12) were thought to be at risk. As the regional banking stresses have continued into the second quarter, it is likely that next quarter’s report will continue to show additional tightening.
With the recent Fed report showing banks are making it harder for some companies to access C&I loans and/or only access them at higher rates, it could mean higher yields and spreads for the High Yield index broadly.
Source: Federal Reserve, Bespoke Investment Group, Bloomberg, LPL Research
How to select stocks using a simple 5-step framework
1. Universe of ideas: define your investable universe
2. Circle of competence: only invest in what you understand
3. Financial stability filter: filter for companies with a healthy balance sheet, high profitability and attractive growth rate
4. Wide moat: only keep the companies with a sustainable competitive advantage
5. Price filter: select the companies which trade at a cheap or fair price
Source: Compounding Quality
The Buffett indicator
The Buffett Indicator is one of many examples of the genius of Warren Buffett.
His simple ratio of the total U.S. stock market capitalization (Wilshire 5000 Index) to U.S. Gross Domestic Product (GDP) is an easy measure to assessing the relative value of the stock market versus the economy at a given point in time.
While not a perfect comparison, one would expect the two to grow roughly parallel over time and should generally be a stable relationship. Given that the stock market value represents the present value of expected future economic activity, and that GDP is a measure of most recent actual economic activity, the ratio of these two data series represents expected future returns relative to current performance.
It also explains a large percent of return variation for the majority of countries outside the United States in nations possessing larger stock markets with higher accuracy.
The current U.S. ratio of 165% is approximately 38.24% (or about 1.2 standard deviations) above the historical trend line, indicating that the stock market is overvalued relative to GDP. We remain far off the bubble peaks back in the late 1960s, the dot-com bubble, or the post-pandemic bubble.
Source: Current Market Valuation
Work-Life balance
Balance isn't about equal parts. It's about finding where you feel balanced.
For some, balance may involve working long hours for a few weeks or months and then taking a longer break to recharge. Others may prefer to work shorter days and take frequent breaks throughout the day to pursue personal interests or hobbies. And for some, balance may mean taking a step back from work altogether to focus on their health or family.
The key is to find what fits your own individual needs and priorities. There is no “normal,” standardized equilibrium.
Balance is where YOU feel balanced.
Source: Daniel Abrahams
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily.