Another month, another strong jobs report.
On Friday, the Labor Department reported the economy added 209,000 new jobs in July, the second consecutive month of job growth above 200,000. The unemployment rate ticked down to 4.3%.
The report confirmed what most of us already knew: The U.S. economy is mostly in very good shape. True, workforce participation remains depressed and wage gains are subdued (both for structural reasons, I’d argue), but the good second-quarter GDP number (2.6%) and the last two jobs reports suggest growth may be picking up.
If this continues, even with 2.5% wage growth, I think the Federal Reserve will hike the federal funds rate at least once more this year, though traders currently aren’t expecting it.
Gradual rate increases, accelerating economic growth and solid corporate earnings are all good news for stocks, which is why, though a correction is long overdue, I expect the market to keep moving higher over time.
But I’d like to step back from the weekly market madness to take a closer look at what’s really happening in the job market.
While many of the market’s hottest stocks just keep going and major market indexes this week scored record highs—again—the bears have planted a big red flag.
On Thursday the Dow Jones Industrial Average closed at an all-time high just shy of 21,800. The day before, the Standard & Poor’s 500 index hit its record close near 2,480, and the Nasdaq Composite index reached its closing peak of 6,422.75.
Bang-up sales and earnings from FAANG stars Facebook and Netflix propelled those stocks to new all-time highs. Alphabet, parent company of Google, and Amazon had sharply lower second-quarter results, wiping out the brief ascent of Jeff Bezos, who owns 17% of Amazon’s outstanding shares, past Bill Gates on the Forbes list of the world’s wealthiest people, with a net worth of over $90 billion. Nice work if you can get it.
I’ve written recently that the FAANG stocks are ripe for profit taking or correction. These are great, disruptive businesses, but investors have piled into these shares and they now trade at hefty, if not nosebleed, valuations. Even trees don’t grow to the sky.
Yet the market may have a bigger problem than the FAANGs.
June’s jobs report, released Friday morning, was the best in months, by almost every measure.
The headline number was that in June the U.S. economy added 222,000 jobs, the most since February. Also, the April and May totals were revised upward by 47,000, demolishing the idea of a “weak spring”: The last three months saw 194,000 additional jobs on average.
The unemployment rate ticked up to 4.4%, but that may have been because more discouraged workers reentered the labor force. (Workforce participation rose in tandem with unemployment last month.)
And, in a disappointing number, hourly earnings grew by only 0.2%, or 2.5% over the last 12 months. Despite a labor market close to full employment and theoretically millions of unfilled jobs, employers still haven’t found it worth their while to raise wages.
But in all the punditry and instant analysis that followed, one number got short shrift, in my opinion.
This week the Dow Jones Industrial Average and Standard & Poor’s 500 index both hit new all-time highs, but it sure didn’t feel like it.
Volume, which has spiked periodically on new highs—or on the days the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet, or Google) sold off big—has been average at best.
The Nasdaq Composite index and the FAANGs themselves have bounced back a bit from their recent correction, but they’re still off their record highs.
Wall Street’s so-called “fear” Index, the CBOE Volatility index, or VIX, is hovering just above ten again, again in complacency territory.
So, what, besides early-summer doldrums, is going on?
Last Friday and Monday’s sell-off in the FAANGs (Facebook, Amazon, Apple, Netflix, and Google—or Alphabet) may have been the end of the recent mania for those high flyers, but I don’t believe it was the end of the bull market.
Late Friday afternoon, the Dow Jones Industrial Average and the Standard & Poor’s 500 index were within a whisker of their all-time highs, and the Nasdaq Composite index, which bore the brunt of the FAANG selling, was still only about 3% off its record peak.
The FAANGs, however, have remained subdued, except for Amazon which announced Friday morning it was buying Whole Foods Markets for $13.7 billion.
Instead of a major correction or bear market, I think we’re likely seeing rotation away from the super-momentum FAANGs and back towards the cyclicals, which led the so-called Trump rally.
Financial ETFs, for instance, have seen a big inflow of investor cash as some of the big Wall Street firms take profits on their holdings of the FAANGs and redeploy them to the sectors that set the pace between Election Day and early March.
Will it work?
Politics dominated the news this week from Washington to London, but Rip van Wall Street might as well have slept through it all.
In some of the most dramatic Congressional testimony in years, fired FBI Director James Comey told a Senate Intelligence Committee hearing that President Donald Trump had lied and tried to defame him and the Bureau.
Comey also laid out some facts about their encounters that could constitute obstruction of justice of the investigation of connections between the Trump campaign and the Russian government. (He said the president himself wasn’t under investigation, which Trump later tweeted was “total and complete vindication.”)
Meanwhile, across the pond, the Conservative Party lost its parliamentary majority as the opposition Labour Party picked up 31 seats in the House of Commons. That left Prime Minister Theresa May, who called the snap election to get a bigger working majority, scrambling to form a government as the U.K. prepares to enter “Brexit” negotiations with the European Union.
And how did the markets react to all this “turmoil”? As of late Friday afternoon, the Dow Jones Industrial Average traded at new all-time highs, but the Nasdaq Composite index sold off big on heavy profit taking.
So, do these big political events matter?
Another month, another jobs report, and another mixture of good and bad news.
The good news was that unemployment fell to 4.3% in May, down half a percentage point since January and its lowest since 2001. Job growth was strong in the perennial winners, health care and professional and business services. Wages also grew at an annualized 2.5%, not great but still on target.
And that was it.
Employment growth of only 138,000 was well under economists’ consensus estimates. Job growth in March and April turned out to be 66,000 less than was previously reported. And job growth has clearly decelerated, from an average 181,000 over the past 12 months to only 121,000 over the last three, about a one-third decline.
This chart from Econoday on Barrons.com shows that job growth likely peaked in February 2015 and has been slowing ever since. Meanwhile, the workforce participation rate, the Achilles’ heel of this recovery, slipped 0.2% to 62.7% in May after having stabilized a bit recently.
And the Dow Jones Industrial Average, Standard & Poor’s 500 index and Nasdaq Composite index all hit new all-time highs in late afternoon trading.
What does all this tell us?