US stocks were up this week, but the best performance came from International, both Developed and Emerging. As we discussed a few weeks ago, diversification pays off (Why Own Emerging Markets?)! But the real highlight was the infamous “jobs” number, more formally known as non-farm payrolls.
Economic commentators love to focus on the jobs number released monthly by the Bureau of Labor Statistics. Why? Because the monthly change is so incredibly volatile and difficult to predict, that it is guaranteed to make headlines one way or another. Rarely does it come in as expected. This month was no different, with the 235K print well below the 750K expectation.
While the volatile monthly number is of limited meaning, there is a genuine story to tell when we take a few steps back. Rather than looking at the monthly change, if we look at the total number of employed, we see that at the worst of the pandemic (April 2020), about 22 million jobs had been lost. Since then, about 17 million jobs have been created, leaving a gap of over 5 million jobs. But the real gap is worse, as a healthy US economy should be creating at least 200K jobs per month. Factoring this in, the job market is about 8.8 million jobs short of where it should be (5M + 200K for 19 months).
This year, the average rate of job creation per month has been about 560K jobs. At that rate, it will take another three years to close the gap fully. So what does all of this mean for investors? The Federal Reserve is closely watching the unemployment data and inflation to help determine when they should pull back on stimulus. Investors are closely watching the Fed. At this point, any excuse for the Fed to extend stimulus has the potential to be viewed positively by investors. Perhaps we are at that point where bad (or at least slightly disappointing) news on the economic front is good news for investors.
Headlines This Week
We received some insight into the state of the jobs market this week, and it was disappointing.
- On Wednesday, the August ADP payrolls number came in lower than expected at 374K versus a consensus expectation of 610K.
- On Friday, the more comprehensive non-farm payrolls report also fell short, with just 235K jobs created versus an expectation of 725K.
- The market reaction was fairly sanguine for a couple of reasons. First, these data series are volatile, so reading too much into one month isn’t easy. Second, any weakness will likely mean (all else equal) that the Fed will be slower in pulling back stimulus.
Headlines regarding the second infrastructure bill, also called the human infrastructure bill or reconciliation bill, are starting to pick up again. Investors are balancing two aspects: the stimulus, which has the potential to continue to drive economic growth, and the taxes, which could impact corporate valuations and investor capital gains taxation.
- On the tax front, it is being reported that corporate tax increases from 21% to 25 or 26%, capital gains increases for the wealthy from 23.8% to 31.8% (including the 3.8% medicare surtax), and higher taxes on international earnings are all on the table. These are lower rates than were initially discussed by the administration.
- The structure or the bill will undoubtedly change before it is up for a vote. This week Senator Joe Manchin, a swing vote, pushed back on the $3.5T price tag in a WSJ op-ed, noting risks to debt and inflation.
There is some good news regarding vaccinations in the midst of the rapid spread of the covid delta variant.
- The Axios-Ipsos Coronovirus Index showed that vaccine hesitancy has dipped to its lowest level since the pandemic began. 20% state that they are “not very likely” or “not at all likely” to get the covid vaccine, down from around 30% just a few months ago.
- Investors reacted positively to the report this week, boosting small-cap stocks that have the most to benefit from a covid recovery.
Jackson Hole Hangover
The rise in stock prices on Monday appeared to be a continuation of the positive response to the Fed Chair’s speech at Jackson Hole – which was just what stock investors ordered… a serving of no surprises with a side of dovishness.
The Week Ahead
While the Fed is quiet next week, three other central banks will be in the headlines as the market keeps a close eye on their plans for tapering.
- The Reserve Bank of Australia (RBA) will kick things off on Tuesday with their monthly policy meeting.
- Last month, the RBA stuck to its tapering plans despite rising covid cases and expanding lockdowns.
- While the decision is somewhat unpredictable, expectations are for the central bank to stay on course with a continued reduction in asset purchases.
- The Bank of Canada (BoC) will meet Wednesday with a strong expectation that no changes to their ongoing tapering are due before the country’s federal elections later this month.
- Lastly, the European Central Bank (ECB) will meet Thursday amid growing hawkish attitudes.
- The market seems to think that the ECB has set the stage for an announcement that tapering could come as early as next week.
Look out for a few US key metrics coming out next week.
- On Wednesday, the Job Openings and Labor Turnover Survey (JOLTS) is out.
- After hitting a record high last month with over 10 million job openings and a less than stellar non-farm payroll increase, expect to see another considerable number.
- Also on Wednesday will be the Fed’s beige book which includes the current economic situation in each of the 12 Federal Reserve Districts.
- Wrapping up the week on Friday will be the Producer Price Index (PPI) which is expected to continue climbing to 8.3% from last month’s record high of 7.8%, showing that inflationary pressures are sticking around for now.
Monday is Labor Day marking the unofficial end of summer.
- Hopefully, everyone can enjoy some time off over the three-day weekend!
- Also, we wish a happy Jewish New Year to everyone on Tuesday.
- The PGA season will wrap up this weekend for the golf fans out there as we patiently wait to see who will win the Tour Championship.
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