Edition #17 - 6.7.2021
Non-Farm Payroll & Labor Force Participation, S&P 500 Overnight Gains Drive the Market, El Salvador Embraces BTC
Economy:
The economic data that I saw on Friday and over the weekend was fairly underwhelming. The major news that came out was from Friday was the non-farm payroll figure for the month of May, which was an increase of 559,000. As part of the report, the unemployment rate decreased from 6.1% in April to 5.8% in May. The report was a bit of a mixed bag, as the consensus estimate was for 675,000. While it seems positive that the unemployment rate declined, so did the labor force participation rate (LFPR), which I believe to be a more critical data point. The LFPR simply measures the percent of the working aged population (16 and older) that is currently employed or seeking employment. Essentially, the LFPR takes a broad measure of the entire labor market by calculating how many eligible potential workers are participating in the labor market. When the LFPR decreases, it’s a sign that eligible workers are leaving the labor force and no longer looking for employment opportunities.
As unemployed individuals search for work, but become disgruntled by the opportunities or choose to prioritize their leisure time, they leave the labor force by no longer looking for employment. When they leave the labor force, all else being equal, the unemployment rate should decrease! Considering that the unemployment rate simply takes the number of unemployed individuals in the labor force divided by the total size of the labor force, a decline in the labor force will cause the LFPR and unemployment rate to decrease.
Ideally, in a recovery, an economist would want to see the labor force participation rate increase, as people who were out of the labor market begin to re-enter & search for new opportunities in an expanding economy. The pre-pandemic level of the LFPR was 63.4% in January 2020, nosedived to 60.2% in April 2020, and has fluctuated between 61.4% and 61.7% from June 2020 - May 2021. It’s worthwhile to note that the LFPR was declining steadily since 2006 and only began to rise from October 2015 - January 2020. To see a history of the LFPR since 2001, check out the following link.
In order for the Fed to feel confident that the economy has reached maximum employment, we’ll need to see a full recovery in a variety of labor market data & not just the unemployment rate. While the decline in the unemployment rate to 5.8% is encouraging in and of itself, I’d actually prefer to see temporary increase in the unemployment rate due to an increase in the labor force participation rate. In doing so, that would reflect a growth in the participants of the labor market & a competitive environment for jobs. It might also indicate that people outside of the labor force are attracted back to the job market due to higher incentives for work, aka higher wages, benefits, flexible schedules, etc. As the new labor force participants initially search for work that match their qualifications & criteria, this would cause the unemployment rate to initially rise until they find an opportunity. If our economy is truly experiencing a recovery, they should be able to find those opportunities rather quickly, as businesses are looking to expand & meet rising levels of demand.
This was a dynamic that was missing from the recovery following the Great Recession, which is considered to be one of the weakest, if not the weakest, recovery in U.S. economic history. I do not champion a rising unemployment rate, far from it, but I do believe that it could be temporarily welcomed so long as it is due to a growth in the labor force of eligible citizens.
Stock Market:
Every so often, I see a post that highlights the divergence in performance of the S&P 500 during normal trading hours and the after-market hours. It’s really quite something to see because it highlights just how active the market is, even when it’s not exactly “open”. While I’ve seen some that span longer time scales, here is one provided by Bespoke:
Starting from around the COVID lows in March 2020, we can see that almost all of the gains achieved in the S&P 500 during normal market hours (in which an investor repeatedly buys the index at 9:30 am ET and sells their position at 4:00 pm ET every day) were earned in the first few weeks of the new bull market. Since then, the returns are essentially range-bound between +5% and +15%. As it currently stands, this strategy has produced a return of +12% since March 2020. It’s worth noting that an investor who initiated this strategy in August 2020, would currently have a negative return of roughly -6%.
Meanwhile, an investor who buys the index exactly at the market close & sells their position at the market open the next morning, has achieved a phenomenal rate of return of +68.9% since the COVID lows. That’s a massive amount of outperformance implementing one of the most simple & easily understood strategies to execute. Clearly, owning the S&P 500 outright through a buy-and-hold strategy has outperformed the “buy the close, sell the next open” strategy but it’s very interesting to see how return of these opposite strategies have had massively different returns.
This isn’t necessarily an anomaly either, or some fluke of the COVID equity market. Produced in 2019, Bespoke also shared the following chart which details the same two strategies dating back to January 1993:
While the results echo the same sentiment, this long-term chart actually shows an even worse divergence in which the “buy the open, sell the close” strategy produced a net loss of -15% over the span of the study.
So what does this mean for investors? It seems fairly conclusive from these two charts that an investor is likely better off when they enter a position at/near the market close rather than at/near the open. Conversely, they would likely be better off to sell their position at/near the market open. This has interesting implications for long-term investors who want to dollar-cost average the positions in their portfolio, particularly as they first begin to invest, and compliments the importance of dollar-cost averaging. For traders who rely on technical analysis, timing of a specific security’s price action is very important, so I’m not sure how practical this really is. With that said, it could be worth to confirm that a specific move in a stock’s price remains strong throughout the session & into the close, before entering near the end of the session.
Cryptocurrency:
The Bitcoin Conference just completed over the weekend, in which many leading voices within the crypto community spoke at the event, participated in fireside chats, and generally held discussions on new developments within the space. I watched a good amount of the live stream & watched highlights from throughout the conference, but the biggest announcement/development came on Saturday evening. The announcement came from the president of El Salvador, Nayib Bukele, who will be proposing a new bill to make Bitcoin legal tender in the country.
The importance of this milestone cannot be understated, as it would mark the first ever country who will make this step. If the bill is passed, the designation as legal tender means that any private or public debt within the country can be resolved by payment in BTC. Additionally, citizens can pay their tax liability in BTC as well. Bukele gave a small sample of the bill that is being proposed, which contained an amazing quote & sentiment.
Central banks are increasingly taking actions that may cause harm to the economic stability of El Salvador; That in order to mitigate the negative impact from central banks, it becomes necessary to authorize the circulation of a digital currency with a supply that cannot be controlled by any central bank and is only altered in accord with objective and calculable criteria.
While this section of the bill doesn’t explicitly call out the Federal Reserve, it seems quite obvious who this is directed at, especially once you understand that El Salvador’s currency has predominantly been the USD since 2001. Essentially, the country of El Salvador, which has an entirely different economic cycle & condition than the United States, has been subject to the monetary policy of the United States & had to withstand the impact of trillions of dollars of new money supply. In a report from December 2020, the Federal Reserve Bank of St. Louis indicated that 35% of all U.S. dollars to ever exist were printed in the 10 months preceding that report. For better or worse, El Salvadorians have been directly impacted by that, essentially reducing their economic independence.
Bitcoin represents monetary freedom in the sense that it cannot be manipulated, changed, altered, or corrupted. The supply is fixed at 21 million & the rate of incoming supply is mathematic and introduced at an increasingly reduced rate. As such, it is finite with a well-understood incoming supply. While USD can be printed digitally out of thin air, and new gold mines could be discovered at any moment, Bitcoin is programmatically fixed.
El Salvador’s GDP in 2019 was just over $27Bn, which is incredibly small relative to the United States at $21.4Tn. Essentially the U.S. economy is 792x as large as El Salvador. At the time of writing, the market cap of BTC is $683Bn at a price of $36,400, or more than 25x larger than the economy of El Salvador.
My optimism for Bitcoin continues to grow.