5 Day Losing Streak
The stock market fell on Friday for the 5th time in a row. Stocks rebounded from the low on the day to only close modestly lower.
Traders acted rationally in that they didn’t sell stocks vehemently on the BLS miss. They realized these reports can be volatile, so stocks didn’t crash. From 1:10 PM to the close, the S&P 500 rose 0.72%. It fell 0.21% on the day. Nasdaq fell 0.18% and the Russell 2000 only fell 0.11%.
Even though stocks fell, the VIX fell 3.25%. CNN fear and greed index fell another 4 points to 55 as it is now at neutral. Worst 2 sectors were energy and consumer discretionary which fell 1.95% and 0.66%. Best 2 sectors were the utilities and materials which increased 0.36% and 0.21%.
Treasuries rallied again to end the week. The 10 year yield fell 1 basis point to 2.63% and the 2 year yield fell 1 basis point to 2.46%. That means the 2 year yield is only 6 basis points higher than the Fed funds rate.
5 Day Losing Streak - Big BLS Miss Was Different From ADP
Atlanta Fed’s estimate for real government expenditures fell after the BLS report. That’s because the government lost 5,000 jobs as the chart below shows.
Even considering that, the BLS’s 25,000 private sector gain is way different from the 183,000 gain in the ADP report. Some parts were very close and other parts were far apart. ADP was correct to show leisure and hospitality job gains were weak as the BLS report showed the industry added zero new jobs.
Professional and business services industry was strong in both readings. One of the biggest differences was construction. ADP had the industry adding 25,000 jobs. But the BLS report showed it was the worst category as it lost 31,000 jobs.
It makes sense for construction to be weak because I’ve reviewed data which shows construction jobs have increased much quicker than the volume of construction has. Manufacturing only added 4,000 jobs which missed estimates for 11,000 and January’s reading of 21,000 jobs.
That weakness makes sense because the Markit and ISM PMIs showed the manufacturing sector weakened. The economy can create jobs without the manufacturing sector. A problem with this report was most industries were weak and only one segment was solid.
5 Day Losing Streak - Unemployment Rates Crater
Even though job creation missed estimates, the unemployment fell from 4% to 3.8%. We’ve seen a few great labor reports where the unemployment rate jumped.
That’s why you can’t use the unemployment rate’s potential bottom as an economic signal if the differences are small. The rate can easily move a few tenths each month, so the bottom of 3.7%, which was reached in September and November, isn’t solid. The bears were grasping at straws claiming that was a sure bottom. You need to see more of an increase in the unemployment before you call for a recession.
At the recent peak in January, the rate was still down 2.4% year over year. Now it’s down 7.3%.
As you can see from the chart below, the U-6 unemployment rate, which measures the marginally attached workers and those who work part time for economic reasons, cratered from 8.1% to 7.3% which is a new cycle low.
The government shutdown caused the U-6 rate to increase in January from 7.6%. Even when you acknowledge that, this was a huge decline. Now we must compare this new low with the past 2 cycles. In December 2006, this rate bottomed at 7.9%, and in October 2000 the rate bottomed at 6.8%. This monthly decline pushed this rate closer to the 2000 trough than the one in 2006.
Personally, I think the labor market stats will come closer to the 1990s cycle than the 2000s one. There won’t be a housing bubble to prematurely end this expansion.
5 Day Losing Streak - Wage Growth
Average hourly earnings growth was 0.4% on a monthly basis which beat estimates for 0.3% growth and the 0.1% growth in January. It’s worth noting the easy comparison from last month. Average hourly earnings growth on a yearly basis was 3.4% which also beat estimates by 0.1%. Growth accelerated 0.2% from the previous month.
Even with this amazing wage growth, weekly take home pay growth fell because the average work week fell from 34.5 hours to 34.4 hours which missed estimates for no change.
Average weekly pay growth was 3.1% which fell from 3.4% growth last month. This isn’t necessarily a disaster as the growth rate has been in a range between 3% and 3.6% since February 2018. The point here is nominal earnings aren’t accelerating. That’s not great, but also not a shock given how weak job creation was.
5 Day Losing Streak - Labor Market Fullness
If the unemployment rate fell or the participation rate rose because of solid job growth, it would be good news. This report showed weak job growth, a decline in the unemployment rate, and a steady participation rate at 63.2% which met estimates.
As you can see from the chart below, there was a modest decline in the age adjusted labor participation rate.
The primary age labor force participation rate fell from 82.6% to 82.5%. That’s not a surprise because this rate has been increasing slowly. The 0.3% jump last month was bound to be partially reversed. Now the rate is 0.9% away from the peak last cycle.
At last month’s rate, that peak could be reached in 3 months, but that’s highly unlikely to occur. The labor market is nearly full, but it won’t reach full employment this year.
5 Day Losing Streak - Conclusion
The stock market is down 5 straight days, but it’s not down enough for me to switch to being bullish. My reaction to this one-off weak jobs report is a shrug, which is the same thing traders did.
When you average the last 2 reports together, the labor market is still strong. I’m excited to see the ECRI leading index improving. The next positive change I’m looking for is a solid earnings season. That would signal the slowdown is ending.
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