Record Dow Jones Industrials Dwarfed by Transportation Index

US labour markets move from good to better as the June jobs figures delivered one of the broadest showings in employment creation.  The 288K increase in non-farm payrolls, was accompanied by a new six-year low in the unemployment rate of 6.1%.

In terms of sectors, manufacturing jobs added a net increase of 16k, retail jobs added 14k, health care added 21k and services/professional services added 67k. Even government jobs added 26k, courtesy of local governments.

The labor force participation remained unchanged at a three-decade low of 62.8% but the U6 unemployment (marginally attached to labour force and part-time workers due to inability to find FT work) dropped to 12.1%, also the lowest since September 2008. The non-farm payrolls figures showed the 45th consecutive month of job creation in the US, matching the third longest run since World War Two, and four months short of an unprecedented streak of jobs creation.

Offsetting GDP Reality

The persistent improvement in the US labour market is a much a needed counter to the 2.9% decline in Q1 GDP and the stark reality that each of the ensuing three quarters must grow by at least 5% to register an average annual growth above 3%.

But as we have learned in the past, markets can adjust to the new normal and may well add another 10% to current equity index performance even at sub-par GDP growth. With business surveys further expanding and employment demand catching up with supply as the bad weather story remains behind us, economists will wish for housing to fill in the rest of the void.

From Draghi’s Bazooka to US Jobs Explosion

Last month we noted that Draghi decision to slash deposit rates below zero and the the introduction of €400 bn in four-year targeted LTROs would have the effect of Greenspan/Bernanke “put” in boosting already rallying equities. But unlike Greenspan & Bernanke “puts”, which occurred during fierce equity market selloffs in 1998, 2001 and 2009, or Draghi’s LTRO interventions in 2011 and 2012, which emerged during political disarray in Italy, 80% declines in the value of Greek debt , or even a 15% selloff in the Dax, last month’s ECB bazooka emerged during new highs in global equities and macro stabilisation in the Eurozone. And if there were any doubts that the Eurozone shares discount relative to the US was starting to wane, Draghi’s credit-focused bazooka may delay any such cautiousness into late Q3. Today’s US jobs figures present the required fundamental justification (beyond simply low rates) to sustain indices above record levels at a time when shares will likely struggle with waning earnings growth at the looming earnings season.

Record-breaking Dow Jones Industrials dwarfed by Transportation

As the Dow Jones Industrials Average (DJIA) breaks above the 17K level for the first time, we focus on the Dow Jones Transportation Average (DJTA), whose 20 stocks have an average PE of 22.0. The shares include economic bellwether companies such as Delta, United Continental, JetBlue, FedEx, UPS, Ryder, JB Hunt and Norfolk Southern. The DJTA is up 14% year-to-date compared to 4% for the DJIA. The disparity is maintained when comparing performance from the lows of August 2013, with 15% for the industrials and 32% for the transportation.

Considering the premise that transportation stocks are credible indicator for the economy, and the DJIA/DJTA ratio is at its lowest level since 1989, seeing 18,000 in the DJIA before year-end cannot be ruled out.

The DJIA is set to post its sixth consecutive monthly increase in July. The last time the index rallied for seven straight months was in 2006-2007. Regardless of the manner in which, the gains are made, the case for further run-up in above 17,500 is all too plausible.