Bull market shows no sign of death with support from Yellen

Janet Yellen (Source: Bloomberg) Janet Yellen (Source: Bloomberg)

The weakest employment recovery in seven decades is proving a boon to equity markets.

Five years into a rally that has restored $14 trillion to share prices, U.S. payrolls remain 1.5 million below the level in 2008, according to data compiled by Bloomberg. Resistance to hiring from ConocoPhillips to Walt Disney Co. will help push Standard & Poor’s 500 Index (CME:SPH14) profit margins above 10% next year, the highest ever, data show. Below-average employment was cited last month by Federal Reserve chairman nominee Janet Yellen as the biggest obstacle to raising interest rates.

While American workers struggle, investors are benefiting as expense reductions and record low borrowing costs drive profits and underpin a 167% advance in the S&P 500 over the past 57 months. To bulls like Michael Holland at Holland & Co., equities will keep rallying as long as the Fed remains more concerned about employment than inflation.

“The weakness in jobs is continuing fodder for the Fed to fulfill its most recent and steadfast comments about the support of the economy,” Holland, who oversees more than $4 billion in New York, said in a Nov. 26 phone interview. “Until the labor market gets better, the two parts of dual mandate have to be served,” he said. “I’m still pretty set in my position and prepared to see the market go higher.”

Compensation Down

Employee compensation has declined relative to net corporate profits. The ratio of U.S. wages to earnings dropped to 3.2 in the second quarter, the lowest since 1966, according to data from the Bureau of Economic Analysis. Wages were the highest compared with earnings in 2008, just as the financial crisis was taking hold. The measure averaged 4.5 from 1947 to 2008, BEA data show.

Profitability at S&P 500 companies has increased, with each dollar of sales estimated to generate a record 9.9 cents in net income this year, data compiled by Bloomberg show.

ConocoPhillips, the largest U.S. independent oil and natural gas producer, cut its workforce three of the last four years, while profit margins expanded to 15% in 2012. That compares with 3.3% in 2009, data compiled by Bloomberg show.

Walt Disney Chairman and Chief Executive Officer Robert Iger has spearheaded a widening of operating margin, a measure of profitability, to 21% of sales in the most recent fiscal year from 13% in fiscal 2005, according to data compiled by Bloomberg. At the same time, the media company has fired hundreds of workers and closed offices.

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