While stocks are experiencing volatility after strong gains recently, we remain encouraged by the incoming economic data that suggests a sustainable global economic recovery is underway that supports corporate profit growth and ultimately stock prices.

Positive August Jobs Report and Business Surveys

While job creation has decelerated following a strong initial rebound from the lockdown months, it continues to indicate a healing economy. Nonfarm payrolls expanded by an above-consensus 1.37 million, while the unemployment rate collapsed to 8.4% from 10.2%—positive news considering that just this spring the Congressional Budget Office expected unemployment to be 10% at year end. Importantly, we are also seeing broad-based hiring across sectors, suggesting that many parts of the economy are healing.

The weekly jobless claims are also indicating labor market improvement with claims falling 130,000 last week to 811,000—the lowest level since mid-March. While we have a long way to go to get back to the historically healthy pre-pandemic labor market, we remain encouraged by the progress as the economy reopens.

The ISM Manufacturing Index (a timely business survey) rose higher than expected and for the fourth straight month, to the highest level since November 2018. In another sign of a broad-based recovery, 15 of the 18 ISM industries reported growth, the highest share since March 2019. In addition, four of the five ISM index components increased last month, led by a jump in new orders to the highest level since January 2004. Export orders, imports, and backlogs all increased. Survey respondents viewed their customers’ inventories as too low, with that index dropping to its lowest level since June 2010 (suggesting higher production is needed to replenish inventories).

The ISM Non-Manufacturing Index (a timely service sector survey) showed some moderation in growth after a strong three-month rebound. However, 15 ISM services industries reported growth last month, and only three contracted, consistent with a relatively broad-based expansion. Respondents’ comments were mostly optimistic about business conditions and the economy, as more businesses reopen.

Confirming the improvement signal from the labor market, these surveys imply a continued recovery from the pandemic lows in manufacturing, services, and ultimately the broader economy.

Confirmation from Global Business Surveys

The J.P. Morgan Global Manufacturing PMI (a business survey that includes over 40 countries) reached a 21-month high in August, with rates of expansion in output and new orders rising at the fastest rates since mid-2018. This improvement in the highly cyclical manufacturing sector suggests a strong recovery from the coronavirus-induced economic lockdowns. Importantly, most major economies, including the U.S., China, Germany, the U.K., India and Brazil, registered expansions of output during August.

Last week’s positive U.S. and global economic readings are further confirmation that a new synchronized and sustainable global expansion is underway that should ultimately support corporate profit growth in the coming years. We continue to favor cyclical exposure (including Technology, Industrials, Materials, and Consumer Discretionary sectors) that benefits from improving economic growth.

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