By Veronica Fulton, Research Analyst – GLOBALT Investments
The labor market delivered a disappointing jobs number for the month of April with only 266,000 gains – a little over a quarter of the one million jobs forecasted. Adding fuel to the fire, the unemployment rate rose to 6.1%. The labor force participation rate increased to 61.7%, but this number is still near its lowest level since 1977. With such abysmal numbers, one might expect a correction or, at the bare minimum, a reaction reflecting investors’ dismay. Instead, the market not only shrugged, but smirked, with the 10-year yield dropping -4 basis points and U.S. equity markets up across the board.
After the report surfaced, we began seeing analysts chalk the numbers up to supply-demand mismatches in the labor market. Put simply, many believe the Fed’s accommodative monetary policy and congress’s fiscal relief spending incentivized many Americans to not work. However, with the continued reopening and vaccine distribution, we believe the labor force will return strongly. Supply will meet the demand that is already brewing, the demand we see everywhere, as exemplified by “help wanted” signs from local grocery stores, banks, daycares, and restaurants. After labor supply shortages cease to be a problem, and we move past this transitory mismatch, the markets seem to be suggesting that all will be well, and the stock market will be propelled forward by full employment. Plus, the Fed has made it very clear they are not even thinking about thinking about letting up on quantitative easing until that is the case. So, we’ve found ourselves in a situation where the market cannot go down, even when the economy is not holding up. With that in mind, you can’t help but wonder: is there a such thing as “bad news” or is there only “good news” that has already been priced in?
Just where is the evidence of this red-hot economy that is going to propel the market forward? Perhaps we can look to GDP. Real GDP in the first quarter missed expectations, coming in at +6.4% q/q . But of course, the market took this in stride as the shortcoming was mainly due to a 2.6% drop in inventories. However, there’s likely to be substantial production increases in the upcoming quarters, as homebuilders, factories, and most other production facilities face pent-up demand. Given continued supply chain disruptions, it may take more than one quarter – yet, that did not stop some analysts from raising their real GDP 2Q estimates from 12% to 14%. Once again, even if the economy falls short, the mindset seems to be that the markets are poised to remain strong.
Sentiment indicators are showing excessive optimism and the consensus is that the market can only go higher, despite disappointing economic numbers. What exactly is the accelerant? Perhaps the market itself, with blowout earnings. The problem with that is, in a highly-valued market, even if you have a blowout quarter…what’s next? That’s already expected, already priced in. The good news is old news. Markets have equated a post-pandemic recovery with a boom in employment, GDP, and earnings. In actuality, the recovery will not propel, but simply replace the Fed-induced recovery from which the market has benefitted over the last year. Perhaps, we’ve underestimated the extent to which the Fed has kept the economy and markets afloat. Once government spending is replaced with private income and spending, this will only preserve the recovery already in place. The recovery itself? That’s already priced in. So, where do we go from here? Until we find a true catalyst, nowhere sounds good!
Sources: Ned Davis Research, Cornerstone Macro, Wolfe Research, Oxford Economics.
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