January Jobs Report Catches Economists In Groupthink Trap

January Jobs Report Catches Economists In Groupthink Trap

February 08, 2023

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If you pay any attention to Federal Reserve Chairman Jerome Powell’s comments you’ll know that his primary measurement of progress against inflation is by looking at the domestic labor market and the cost thereof.

Going into the recent jobs report, labor seemed to be steadying and unemployment was beginning to rise as many prominent technology firms had announced large swathes of layoffs. So when Friday's jobs report came in multiple times higher than expected, you can imagine it caused quite a stir.

Consequently, the markets responded by reversing current trends. Bond yields increased, the dollar rose, and the markets experienced a bit of a pullback from its surge of the “off the bottom” with respect to growth stocks.

In this week’s note, I will dive into these labor numbers, focusing on three major components from the Friday report:

  • The jobs number was expected to be up by 180,000. It came in at 517,000+. 
  • The average hours worked increased by 0.3%. To put this into perspective, this is the largest percentage increase in 25 years.
  • The unemployment report dropped to a multi-decade low of 3.4%, down from 3.6%. Economists predicted this number would remain unchanged, if not increase.

Unfortunately for the broad stock market and other risk markets, the strong jobs reports give ammunition to the continued rising of interest rates as the tightening of policy is not yet hurting employment. This creates pressure for equity markets the longer the Fed keeps rates elevated.

When these strong labor numbers are coupled with soft earnings reports from large, recognizable companies, bond yields of all maturities rise and the headwind from the stock market heats up once again. Remember, don’t fight the Fed! This could cause some give back of the strong markets we have seen since the beginning of the year.

To clarify further, the rally that we have seen since the beginning of the year has been largely attributable to those companies that got hit the worst in 2022. At the same time, the companies that did not get hurt in 2022 are the ones being sold by short-term traders and hedge funds. For this reason, the short-term movements in the equity markets should be paid attention to closely and prices should not be chased. 

Although the early months of 2023 remain vulnerable to choppy market action, we expect the S&P 500 to make substantial progress this year, and market history strongly suggests this is likely. Over the past six decades, there have been significant stock market buying opportunities in every mid-term election year, and 2022 proved to be a classic example.

After reaching an initial closing low in mid-June, the S&P 500 staged a short-term rally and then returned to this area in late September. If an economic soft landing does occur, further retesting of the 2022 lows is not likely. The primary determinant of a retest will be the degree to which economic weakness occurs this year. As evidenced by the very strong labor numbers just reported, the hopes for a soft landing rather than a deep recession could be in the cards. Since Chairman Powell has slowed the speed of interest rate hikes—most recently increasing by just one-quarter of a percent versus the previous half and three-quarters of a percent increases—he may be able to keep things from slowing too abruptly.

Pictured above, I’ve notated how you can see a change in the trend of the S&P 500 with a green arrow at the point where the downtrend has seemed to change its direction. In economist terms, this is what is called a "Golden Cross."

A Golden Cross is when the shorter-term moving average (50-day moving average) turns up and punches above the longer-term moving average (200-day moving average. This has historically been a good precursor to further advances in basically all periods. Please take a moment to see below this change. Please note that I have broken out the rates of return if we are:

  1. Only looking at the crossover,
  2. If we are looking at the crossover when the market is in an already established uptrend, and
  3. If the market is entrenched in a downtrend. 

After a great start to the year, things could be a little bit rocky before the markets see a clear path to higher highs and higher earnings. The economy is still absorbing the money printed during the pandemic. Inflation has not been eradicated, the Fed is highly unlikely to loosen policy anytime soon, and earnings are likely to fall as all the stimulus wears off. Like the Super Bowl coming up, no one knows exactly what will happen until the game is played.



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