Best Labor Market Since At Least 1958

Another Slight Decline For Stocks

Investors have one thing on their mind and it’s not the Fed meeting on Wednesday where there will be no change in rates. Every day that goes by without hard evidence that there will be a trade deal means we are one step closer to tariffs being raised on the 15th. I’d say there is a 90% chance they will be raised as my initial optimism earlier this fall has been dashed.

Wall Street Journal reported that America plans to delay the tariffs on China as the 2 sides work on a deal. America wants China to purchase more agricultural goods. While China wants the amount of additional agricultural goods it buys to be proportional to the amount of tariffs America rolls back. Larry Kudlow also stated, the December 15th tariffs are “still on the table.”

The stock market fell on Tuesday because we have heard this story before. There have been endless reports on trade (both positive and negative). We will get a chance to see how well the global economy can recover in 2020 without a trade deal. I’m guessing the recovery will be solid, but limited. 

Don’t think that just because the December 15th deadline passes that this negotiation process will be over. This will drag on a least a few more months even if it goes well.

S&P 500 and the Nasdaq fell 11 and 7 basis points, while the Russell 2000 rose 13 basis points. Small caps outperformed slightly again as the trade war hurts multinational firms more. Even though stocks fell on Tuesday, the VIX was down 0.18 to 15.68. Even though energy usually falls when trade war worries hurt stocks, the sector was up 15 basis points.

Small Caps Underperform, Especially During Regular Trading

As you can see from the chart below, like the rest of the market the Russell 2000 rallies the most during after hours trading (up 136.8%). It’s notable how badly small caps do during the regular trading session as they are up 8.9% in this period since 2009. 

In the past 10 years, the Nasdaq is up 190% outside of the trading session and up 52% during the trading session. In the S&P 1500, small caps have done the worst this year. Large caps are up 26.5%, mid caps are up 24.5%, and small caps are up 20.1%. That’s not a bad return for a laggard. This has been a great year for U.S. equities.

Democratic Primary Update

Healthcare sector was up 0.15% as another group of polls favored Joe Biden. Specifically, Biden was up by 8, 12, and 5 points over Sanders in the 3 national polls released on Tuesday. These polls weren’t bad for Sanders as he is solidly in 2nd place. Biden averages an 11.4 point lead over Sanders who has a 2.5 point lead over Warren. This might become a 2 person race like 2016. Sanders would be the challenger to another establishment moderate. 

Another notable point about this group of polls is that Yang got 4% in the Quinnipiac poll which allows him to debate on the 19th. There will be 7 candidates on stage which is the lowest number by far this year. The race has winnowed. I continue to think Bloomberg is a non-factor. He won’t be at the debate because he isn’t accepting donations.

Most important polling news on Tuesday was that Biden led in the latest Emerson poll of Iowans. This is the first time he led in an Iowa poll since mid-October. He was up by 1 point over Sanders, 5 points over Buttigieg, and 11 points over Warren. This is a terrible poll for Buttigieg because his entire campaign is based on him winning Iowa and riding that momentum into states where he isn’t polling well. 

Shockingly, he lost support to fellow moderate Klobuchar who got 10% in this poll. That’s the highest she’s ever gotten in a poll. This poll is huge for Biden because there has been a working theory that he will lose in the first 3 early states (Iowa, New Hampshire, and Nevada). 

If he loses those 3, some say he will lose support in the states he’s doing well in. Someone even said Biden just needs to get 10% in Iowa as expectations moderated before this poll. Let’s see if Biden, Buttigieg, and Klobuchar go head to head at the debate as each candidate needs the moderate vote.

Best Labor Market Ever?

By a few metrics, this is one of the best labor markets ever. Population adjusted jobless claims hit a record low. The underemployment rate is 0.1% from tying its record low. This is by far the longest run of job creation ever. Average real wage growth has been very strong. 

We will see at the end of the cycle if the average is higher than the past few. That explains why consumer sentiment has been on its 2nd best run ever.

Let’s look at another great stat to add to this list. In 2018, only 7.8% of people who worked or looked for work experienced unemployment. Essentially very few people felt unemployment even for a brief period. Since the labor market stayed strong in 2019, I bet this percentage dropped further. 

2018 level is already a record low going back to 1958 as you can see from the chart below. Prior 2018, the joint lows of 8.6% were in 2000 and 2017.  

Conclusion

Stocks are down for 2 straight days as the fears of tariffs being raised on Sunday have increased. Small caps like all stocks do the best after hours. Biden jumped ahead in the latest Iowa poll as he looks to be the front runner in the Democratic primary. 

This is probably the best labor market ever. Inflation and unemployment are low. Only 7.8% of people in the labor force felt what it was like to be unemployed in 2018 even for a brief period. The labor market is tight. Jobs are being filled by people who previously weren’t in the labor market. 

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