Are Fewer Jobs Good for the Market?

Hiring in the US slowed to 142,000 new jobs in August and the unemployment rate fell back to 6.1%. The labor-force participation rate fell to 62.8% and the average hourly wage grew by 0.2%. I am not an expert in job analysis, but I am going out on a limb and saying that is not the best report I have seen relative to jobs. Like many of you I have seen all the stats being thrown around in Washington DC and in the media by economist and market analyst, so many in fact, my head is spinning just thinking about it. To that end, I find it even more interesting that the federal government has a Bureau of Labor Statistics (BLS) maybe they should just drop the L? Besides all that, we added fewer jobs in August than the average for the last twelve months which is 207,000. What does it mean?

Glad you asked… It means that 142,000 jobs were added from the approximately 19 million who are looking for full-time employment. That reminds me of the saying, “like throwing a deck chair from the Titanic.” Good effort, but it isn’t going to do much to stop the problem. Take the annualized increase in wages of 2.4% or 0.6% net of inflation. The rise in the price of gasoline and food alone means most employed people are not keeping up with the cost increases. That leads me to my question… “Are fewer jobs good for the markets?” The logical side of me would be inclined to say no. In fact, I would go so far as to say the data projected forward would be bad for the markets. However, the markets moved higher? Why the divergent action in stocks versus the logic of math? Simple really… Wall Street has taken on a government mindset. They believe handouts from the Treasury (quantitative easing and zero percent interest rates) are better than putting individuals back to work and thereby creating more spending. That in turn would create greater revenue and profits for companies which would result in stock prices moving higher through normal means of a hand up or work.

For the last five years plus Wall Street has been indirectly handed money through “stimulus” packages created by the Treasury and the Federal Reserve. The results are the weakest recovery in US history. When you give something without working for it, it is generally not appreciated. The stock market however has been very appreciative as it has doubled in the same five year period the economy and workers have struggled. What has been good for stocks has not been nearly as good for the economy. With that in mind, “Are fewer jobs good for the market?” takes on a completely different answer due the revised perspective. Yes, they are good because it would keep the Federal Reserve and Treasury engage in the game of free money versus job creation. The truly staggering statistic is the fact wages (hourly earnings) have yet to match employment growth during this recovery. Recent surveys show that fifty percent of workers believe the economy is still in a recession and I can see why.

When you put all of this data into perspective and look at stock market returns you understand why analyst and investors alike can’t figure out why stocks continue to climb in price. The growth engine for the recovery following the 2008 decline is stimulus, not the consumer. The consumer is less in number and has less to spend. The real driver is stimulus and the thought of that getting cut off by the Federal Reserve ending quantitative easing and the bond buying program in October has investors worried, and rightfully so. The belief by the Federal Reserve that the economy is strong enough for them to begin to raise interest rates on the overnight Fed Funds Rate only adds to that worry. That brings us full circle back to the jobs report adding less jobs in August being good news for the market.

The question we are left to ponder looking forward now becomes, is it enough for the Federal Reserve to rethink their position on keeping stimulus and therefore interest low? Or, do they ignore the data in belief the economy is improving and it is time to take away the printing press that many in, on and around Wall Street want to keep going. Only time will answer that question, but one would hope that the Federal Reserve understands the impact of all this stimulus and free money on the individuals who built this country, workers.

The benefactors of the warped thinking today was the utility sector (XLU) up 1.1% after experiencing a decline of 6.8% when it feared interest rate hikes. I like the sector and there are great stocks for long term portfolios within the sector, but if the speculation relative to the above will help avoid rate hikes from the Fed doesn’t pan out, the downside will be more severe next time around. Remember, take what the market gives, but protect against the market changing it’s mind. Fundamental moves are sustainable, speculative moves tend to end bad unless validated to be true in a timely manner.

Telecom (IYZ) was another benefactor on the upside gaining 0.8%. This is a sector that is sensitive to interest rates moving higher and thus the turnaround in terms of the Fed being delayed in their efforts to push the rates higher short term benefits telecom. REITs (IYR) were up 0.6% and again this is an interest rate sensitive sector that benefited from the speculation.

All of that said, the yield on the thirty-year bond rose to 3.22% and that pushed bond prices lower on the day. The ten-year bond yield rose to 2.45%. Thus, despite all the positives from the speculation on the Fed holding off on stimulus cuts and rate hikes the opinion from investors remains mixed. Only time will tell who is right, but one thing I know for sure is, don’t’ fight the Fed!