Stocks End 4 Day Winning Streak
The stock market fell modestly on Friday in spite of the solid jobs report. Before you question the market’s sanity, remember that there just was a big rally back to new highs. In 4 days, the S&P 500 increased a combined 3.73%. It was a quick recovery from the correction low because the correction was very small. Stocks aren’t as overbought as they were in January, but valuations are still a mitigating factor for returns.
It’s tough to say how much of the decline was related to the coronavirus because the Shanghai Composite was up 0.33% on Friday. It’s up 4.37% in the 3 days since its opening collapse after the holiday ended. The coronavirus has killed 636 people and there are 31,131 confirmed cases.
China is still shut down. Estimates on this virus’ effect on the economy keep being ratcheted up. JP Morgan stated it lowered its estimate for Q1 Chinese GDP growth by over 5% to just 1%. It cut its global forecast for Q1 GDP growth in half to just 1.3%. However, I urge you to look past those dire forecasts because the weakness won’t last as this issue gets under control.
Unemployment & Underemployment Rise
The unemployment rose from its cycle low of 3.5% to 3.6%. However, that increase isn’t problematic because more people came into the labor force. Overall labor force participation rate rose from 63.2% to 63.4%. That’s the highest level since June 2013.
Participation rate fell this cycle because of the aging population. The fact that it’s rising at all shows how strong the labor market is. Similar to the U3 unemployment rate, the U6 rate, which includes the underemployed, rose 0.2% to 6.9% which is the highest rate since October. It’s not an issue that this rate came slightly off its record low.
New Cycle High For Prime Age Workers
Just like the overall labor force participation rate, the prime age rate rose 0.2% which is a new cycle high. It’s now just 0.3% away from the 2000s expansion peak and 1.5% from the peak in the 1990s as you can see from the chart below. Similarly, the prime age employment to population ratio increased 0.2% which is a new cycle high.
It is 0.3% above the peak in the 2000s cycle and just 1.3% below the peak in the 1990s. Since many see the labor market continuing to grow, it's possible that both can increase modestly in 2020. Prime age labor force participation rate will surely beat the 2000s high.
One the one hand, this means the labor market has very limited slack to keep growing above the population growth rate. As a result of this report, JP Morgan raised its forecast for payrolls growth for the next year to 113,000 from 98,000. I disagree with their premise. Even though job creation came in better than expected, the slack decline actually means there’s less room for growth. 113,000 is very achievable; I just wouldn’t raise my estimate because of this report.
On the other hand, while labor market growth is limited, don’t take this to mean a recession is coming. Prime age labor force participation rate can stay near its peak for a few years without issue. This is the same concept I have argued with consumer confidence.
Bears have suggested for at least 2 years that high confidence means a recession is coming, but there needs to be a recessionary catalyst. Outside of the coronavirus causing temporary weakness and Bernie Sanders winning the election, I don’t see any negative catalysts that could cause a recession. Interestingly, JP Morgan stated the labor report lowered its estimate for a recession in 1 year by 0.8% to 35.3%. We shouldn't claim to have the odds of a recession down to a decimal point. That’s false precision.
Higher Wage Growth Coming?
In the past few months wage growth has fallen. It hasn’t been a disaster for workers because it started its descent high and inflation is low. A decline in oil prices will soon make for lower headline inflation if prices stay in the low $50s into the spring. Renaissance Capital’s analysis shows the employment cost index in relation to the job finding rate which is derived from labor market flows. As you can see, the job finding rate predicts wage growth will increase in Q1
Why The Market Whistles Past The Political Graveyard
Fact is the stock market doesn’t get scared of Bernie Sanders winning the Democratic primary. Mostly because it thinks Donald Trump will defeat him. That explains the correlation between Trump’s odds of re-winning the presidency and Bernie’s odds of winning the nomination. Bernie currently has a 45% chance of winning the primary and Trump has a 54% chance of being re-elected.
Recent polls aren’t great for Bernie. Buttigieg is gaining momentum in New Hampshire fresh off his virtual tie in Iowa. Sanders’ lead in New Hampshire in the average of recent polls is just 3.5%. Sanders’ odds of winning the first primary have fallen to 68% and Pete’s odds have risen to 33%.
This race has become very volatile in the past few weeks since Biden was the steady national leader for most of the race and has recently lost momentum. It’s tough to see him winning the nomination. It will be interesing to see how the Tuesday primary goes and how the February 19th debate goes because Bloomberg might participate in it.
Conclusion
The labor market is tightening despite the small rise in the unemployment rate. We might see increased wage growth if the job finding rate is accurate. Democratic primary is wide open now that Joe Biden has lost his front runner status. Many think the most likely candidates to win are Pete and Bernie. A lot will be determined in the next 2 weeks.
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