Stellar December Labor Report - Expectations Were Grim For The December Jobs Report
Heading into the December jobs report, which was released on Friday, January 4th, the S&P 500 was 4.12% above its bear market trough.
One of the top conversation topics in the financial media before the report was released was if a recession was coming in 2019.
The size of the decline in stocks implied something was wrong with the economy. It’s circular reasoning to sell stocks because their decline implies economic weakness is coming. It’s fine to use price action to predict where stocks are going, but you can’t fill in the technical analysis with fake economic analysis to create a narrative.
For example, the decline in regional banks and home builder stocks don’t mean another financial crisis is coming.
During the panic late last year, there weren’t economic reports that suggested a recession was coming in the near term. But investors were scared about the yield curve inverting.
As you can see from the chart below, 38% of the yield curve has inverted and 62% of the overnight indexed swap curve is inverted.
Stellar December Labor Report - Weak economic reports, the trade war, the hawkish Fed, and the yield curve flattening helped lead to a panic.
To be clear, some weakness in rate of change terms isn’t the same as economic reports that indicate a recession. Even though the yield curve inversion was considered the crown jewel of the bearish thesis, the red line below shows a recession isn’t coming in the next 6 months.
Stellar December Labor Report - Blowout Jobs Report: Huge Friday Rally
Negative sentiment and oversold market combined with the great jobs report sent the S&P 500 up 3.43% on Friday. It was refreshing to see good economic news be good news for stocks.
To be clear, sometimes investors treat good news as bad news because it means the Fed will be more hawkish. Also, bad news can be good news if traders think the Fed will provide stimulus.
This report was amazing because of the strong headline number, the increased number of people joining the labor force, the strong wage growth, and the positive revisions.
It was the perfect jobs report unless you’re worried about wage inflation. Personally, I don’t think this is an issue because commodity prices have come down.
Stellar December Labor Report - Sentiment got too negative; this report was a snap back to reality.
The labor market is still strong and there’s very little chance of a recession this year. As you can see from the chart on the right, there were 312,000 jobs created in December which destroyed the estimate for 184,000 jobs created.
This was the biggest beat since May 2009 and the 6th best beat since 1999. As I mentioned, the revisions were strong as well. The November reading was pushed up from 155,000 to 176,000 and the October report was revised up 37,000.
It’s easy to say the BLS report is volatile, which it is, but it’s still a great report any way you look at it.
The chart on the left shows the unemployment rate increased from 3.7% to 3.9%. That’s above the consensus for 3.7%. It increased because so many people joined the labor market.
When the unemployment rate bottoms, it usually signals the cycle is over, but in this cycle it won’t. This has been the longest stretch of continuous job creation ever because of the huge number of people coming off the sidelines.
Millions of people gave up looking for work during the last recession. The U6 unemployment rate, which measures those who are underemployed, was static at 7.6%.
Stellar December Labor Report - Participation Rate Jumps
Private job creation was 301,000 because the government lost jobs. Manufacturing added 32,000 jobs which beat estimates for 19,000 and last month’s reading of 27,000. T
his goes against the weakness seen in the ISM manufacturing report and the regional Fed reports. The labor force participation rate increased from 62.9% to 63.1%. Unlike the prime age rate, this rate hasn’t recovered this cycle because of demographics. This 2 tenth increase is a huge deal.
The number of people actively looking for work increased from 6.018 million to 6.294 million. There is now more slack in the labor market than the unemployment rate indicated last month. I knew there was more slack left because I look at the prime age labor force participation rate.
As you can see from the chart below, the rate increased to 82.3% which is the highest since May 2010. It’s best to compare it to previous cycle peaks to see when the labor force will be full.
Even in the last cycle, which pre-maturely ended because of the housing bubble bust, the percentage peaked at 83.4%.
In the past year, the rate has increased 0.4%. At that rate, it would take almost 3 years to reach the level of employment seen in the last cycle. There is still a decent amount of slack left in the labor market.
It would be foolish and unnecessary for the Fed to raise rates so much that a recession is catalyzed.
Stellar December Labor Report - Educated Starting To See Improvement
This labor market has been great for the poorly educated. The employment to population ratio for those without a high school diploma hit a record high in 2018.
As you can see from the chart below, the employment to population ratio for those with a high school diploma is finally showing signs of life. It rose to an 8.5 year high in the latest report. It is still far below the previous cycle high in 2006-2007.
Stellar December Labor Report - Conclusion
No data point can determine your entire macro position, but the December labor report was a watershed moment for the market.
Traders were caught being short as a fantastic labor report came out which indicated a recession isn’t likely in the next few months.
This confirms my view that the labor market still has some slack left and the economy isn’t near a recession. This makes stocks a short term buy. I will go into more detail on the labor report in a future article.
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