It was another volatile week as equities were mixed, and yields continued their march higher. We continue to find ourselves in the midst of a mid-year correction, which is admittedly discouraging. But why can’t we see the silver lining?
First, let’s try to understand what drove the narrative and the market this week. There were three significant reports related to job growth released:
- JOLTs (Job Openings & Labor Turnover)
- ADP Employment Change
- Non-Farm Payrolls
These reports each moved the market as they significantly differed from consensus expectations. Moreover, the market dynamic is still very irregular, where many pieces of independently good news are causing adverse reactions to stocks and bonds.
Let me explain. The overall market consensus is that higher interest rates will be a drag on equity performance. The Fed has stated they anticipate keeping rates higher for longer to ensure inflation continues to decline steadily. What could cause inflation to stay higher than target? One possibility is through a strong consumer that continues to spend on goods and services. Clearly, people need money if they’re going to spend, which means they need jobs. Hence, these job reports have been an extreme focus.
This week, both the JOLTs and Non-Farm Payrolls report came in well above expectations. The market reaction to this news was pessimistic, as an excessively robust jobs market would potentially mean more interest rate increases from the Fed and maintaining those rates for longer. And if all you see is the headlines, then perhaps the takeaway is the labor market is too hot, and we know what the Fed will have to do to cool it off.
However, as we always say, you must get past the headline. Especially this week, as other less prominent reports should let us see the silver lining:
- Labor Force Participation Rate: has fully rebounded to the 5-year average of pre-Covid levels.
- Average Hourly Earnings: nominal wages are increasing at the same level as the 5-years before Covid.
- Unemployment Rate: remains historically low, and the largest component comes from new entrants and reentrants as opposed to job losers or job leavers.
All of this is to say while the jobs reports were robust (a good thing during most market environments), there appears to be an additional silver lining, and that is the jobs market does not seem to be “overheated” or “tight.” If these trends continue, the balance of evidence would suggest that we might be in the middle of a sustainably healthy jobs market with higher supply and reasonable wage growth. Neither of which should drive inflation or the need for additional rate increases.
Economy
- It was a mixed week for equity markets to start the quarter, with the S&P 500 up 0.5%, the Nasdaq up 1.6%, and the small-cap Russell 2000 down -2.2%. The multiple payroll reports added volatility with sizeable moves each day.
- U.S. non-farm payrolls increased by 336K in September, well above an upwardly revised 227K in August, beating market forecasts of 170K. The strongest job gain in eight months signals that the labor market remains resilient despite the Fed’s tightening campaign.
- Average hourly earnings for all employees on U.S. private non-farm payrolls rose by 0.2% in September, the same pace as in the prior month and slightly below market forecasts of a 0.3% increase.
- The labor force participation rate in the United States was unchanged at 62.8% in September, the highest since February 2020, when the pandemic started to hit.
- According to ADP, private businesses in the U.S. hired 89K workers in September 2023, the least since January 2021 when private employers shed jobs, and well below market forecasts of 153K.
- The number of job openings rose by 690K from the previous month to 9.61M in August, well above the market consensus of 8.8M. This indicates continued strength in the labor market despite the Fed’s monetary policy tightening measures.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Energy and Consumer Staples lagged. Growth stocks led value stocks, and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 21 basis points to 4.78% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
