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The Improbably Strong Economy

A lot had to go right for the U.S. to avoid a recession. So far, it has.

By JUSTIN LAHART
Mon, Nov 6, 2023 10:09amGrey Clock 3 min

The economy is still generating jobs. A year ago, a lot of economists and Federal Reserve policy makers thought that it would be shedding them by now.

On Friday, the Labor Department reported that the U.S. added a seasonally 150,000 jobs in October from the previous month, versus September’s gain of 297,000 jobs. Some of that step down was due to auto workers’ strikes, which have since been resolved but temporarily caused workers to not draw paychecks.

Average hourly earnings rose 0.2% from a month earlier, putting them 4.1% higher than a year earlier. That was the smallest year-over-year gain since June 2021, though unlike then wages are now outpacing inflation.

One takeaway is that the job market is moderating, but not buckling—a message reinforced by a variety of other data, including low levels of weekly unemployment claims and layoffs. Another is that the Federal Reserve is probably through with tightening: Futures markets on Friday morning indicated that the chance of the central bank raising its target range on overnight rates at its December meeting was below 10%. The yield on the 10-year Treasury note, which briefly hit 5% less than two weeks ago, continued to retreat Friday, falling to 4.53% midmorning.

This wasn’t the sort of job market the Fed expected. When policy makers offered projections last December, they forecast that the unemployment rate would average 4.6% in this year’s fourth quarter, versus the 3.7% rate (since revised to 3.6%) they had seen in the November 2022 job report. That was tantamount to a recession forecast, though they didn’t put it that way, since such a large increase in the unemployment rate would count as a strong signal the U.S. is in a downturn. Friday’s report showed the October unemployment rate at 3.9%.

Economists got it wrong, too. In October of last year, forecasters polled by The Wall Street Journal estimated the unemployment rate at the end of 2023 to be at 4.7%, on average. They also put the chances of a recession within the next 12 months at 63%. By last month, they dropped the recession chance to 48%. Available data show that, as a group, economists have never forecast a recession before it has actually started. Now it looks as if the one time they did forecast one, they were either wrong or early.

It is easy to make fun of other people’s past forecasts, but considering the hurdles the economy has had to clear, it really is striking that it has done so well. A year ago there was some hope that the continued recovery in the service sector, and service-sector jobs, might help take up the slack as the goods sector adjusted to slowing demand. But there was also the concern that the service sector could run out of steam before the goods sector found its footing.

Another worry: That the excess savings that Americans had built up after the pandemic struck would run out, and that would cut into their ability to spend. But recent revisions to the available data suggest there was more money left in the tank than thought.

To these, add that inflation has cooled despite the addition of 2.4 million jobs so far this year, and gross domestic product is expanding much faster than economists expected. Plus, at least so far this year, the economy has made it through a regional bank crisis, a sharp increase in both short- and long-term borrowing costs, and the resumption of student-debt payments.

The jury is out on what happens next. The cooling in the job market could turn into a lurch lower, for example, as the full effect of the Fed’s past rate increases begins to take hold. Inflation, which is still too high, could accelerate, prompting the central bank to further tighten the screws.

But the chances of the economy avoiding a recession seem stronger now than they did even a few months ago. A lot of that would be down to luck, but it would nonetheless be something worth celebrating.



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These stocks are getting hit for a reason. Instead, focus on stocks that show ‘relative strength.’ Here’s how.

By KEN SHREVE
Wed, Jun 12, 2024 4 min

A lot of investors get stock-picking wrong before they even get started: Instead of targeting the top-performing stocks in the market, they focus on the laggards—widely known companies that look as if they are on sale after a period of stock-price weakness.

But these weak performers usually are going down for good reasons, such as for deteriorating sales and earnings, market-share losses or mutual-fund managers who are unwinding positions.

Decades of Investor’s Business Daily research shows these aren’t the stocks that tend to become stock-market leaders. The stocks that reward investors with handsome gains for months or years are more often  already  the strongest price performers, usually because of outstanding earnings and sales growth and increasing fund ownership.

Of course, many investors already chase performance and pour money into winning stocks. So how can a discerning investor find the winning stocks that have more room to run?

Enter “relative strength”—the notion that strength begets more strength. Relative strength measures stocks’ recent performance relative to the overall market. Investing in stocks with high relative strength means going with the winners, rather than picking stocks in hopes of a rebound. Why bet on a last-place team when you can wager on the leader?

One of the easiest ways to identify the strongest price performers is with IBD’s Relative Strength Rating. Ranked on a scale of 1-99, a stock with an RS rating of 99 has outperformed 99% of all stocks based on 12-month price performance.

How to use the metric

To capitalise on relative strength, an investor’s search should be focused on stocks with RS ratings of at least 80.

But beware: While the goal is to buy stocks that are performing better than the overall market, stocks with the highest RS ratings aren’t  always  the best to buy. No doubt, some stocks extend rallies for years. But others will be too far into their price run-up and ready to start a longer-term price decline.

Thus, there is a limit to chasing performance. To avoid this pitfall, investors should focus on stocks that have strong relative strength but have seen a moderate price decline and are just coming out of weeks or months of trading within a limited range. This range will vary by stock, but IBD research shows that most good trading patterns can show declines of up to one-third.

Here, a relative strength line on a chart may be helpful for confirming an RS rating’s buy signal. Offered on some stock-charting tools, including IBD’s, the line is a way to visualise relative strength by comparing a stock’s price performance relative to the movement of the S&P 500 or other benchmark.

When the line is sloping upward, it means the stock is outperforming the benchmark. When it is sloping downward, the stock is lagging behind the benchmark. One reason the RS line is helpful is that the line can rise even when a stock price is falling, meaning its value is falling at a slower pace than the benchmark.

A case study

The value of relative strength could be seen in Google parent Alphabet in January 2020, when its RS rating was 89 before it started a 10-month run when the stock rose 64%. Meta Platforms ’ RS rating was 96 before the Facebook parent hit new highs in March 2023 and ran up 65% in four months. Abercrombie & Fitch , one of 2023’s best-performing stocks, had a 94 rating before it soared 342% in nine months starting in June 2023.

Those stocks weren’t flukes. In a study of the biggest stock-market winners from the early 1950s through 2008, the average RS rating of the best performers before they began their major price runs was 87.

To see relative strength in action, consider Nvidia . The chip stock was an established leader, having shot up 365% from its October 2022 low to its high of $504.48 in late August 2023.

But then it spent the next four months rangebound—giving up some ground, then gaining some back. Through this period, shares held between $392.30 and the August peak, declining no more than 22% from top to bottom.

On Jan. 8, Nvidia broke out of its trading range to new highs. The previous session, Nvidia’s RS rating was 97. And that week, the stock’s relative strength line hit new highs. The catalyst: Investors cheered the company’s update on its latest advancements in artificial intelligence.

Nvidia then rose 16% on Feb. 22 after the company said earnings for the January-ended quarter soared 486% year over year to $5.16 a share. Revenue more than tripled to $22.1 billion. It also significantly raised its earnings and revenue guidance for the quarter that was to end in April. In all, Nvidia climbed 89% from Jan. 5 to its March 7 close.

And the stock has continued to run up, surging past $1,000 a share in late May after the company exceeded that guidance for the April-ended quarter and delivered record revenue of $26 billion and record net profit of $14.88 billion.

Ken Shreve  is a senior markets writer at Investor’s Business Daily. Follow him on X  @IBD_KShreve  for more stock-market analysis and insights, or contact him at  ken.shreve@investors.com .