Stocks moved dramatically higher on Friday, October 3, because the markets understand Janet Yellen’s “job slack” message. The chairwoman of the Fed is not going to move quickly on rate increases without evidence of corresponding increases in wage inflation and evidence that the size of the labor force has stabilized. Thus far, adjusted for purchasing power, wages are about the same as they were seven years ago. Meanwhile, the percentage of the population earning any dollars from work has diminished sharply.
The creation of hundreds of thousands of net new jobs is certainly better than massive layoffs. What’s more, Mr. Market does not fear the Fed amid a shrinking labor pool and limited paycheck raises. Corporations are free to keep borrowing cheaply, buy back shares of their own stock or acquire other companies. In contrast, do not hold your breath on consumers or real estate. Low rates may have helped consumers get autos because auto lenders will take on any type of borrower. Yet overall consumption will remain relatively stifled by flat household income. Even those that might have some dollars to buy a home are not able to persuade home lenders to lower credit standards. It should not come as a surprise to see sales volume in residential housing continue to erode.
You do not believe that I have an accurate read on the present set of circumstances? Then take a look at the long end of the yield curve via PIMCO 20+Year Zero Coupon (ZROZ). On a day when the Dow jumped 200 points, supposedly due to phenomenal job growth, ZROZ rose 1.04%. The exchange-traded tracker came within spitting distance of yet another 52-week high. More often than not, when stocks soar on good news, bonds falter. The yield curve is flatter than it has been in more than five years, and you can partially explain long-bond strength through labor market weakness.
