Occasionally economic indicators will align to indicate that the economy is neither too hot nor too cold, but—as Goldilocks would say—just right. And while the April jobs report and last week’s Fed statement seem to signal a healthy climate, some market watchers are still feeling skittish at the thought of either a rampant bull or a returning bear.
There are strong opinions on both sides, so for investors wondering what each could mean for their portfolio, this week we break it down.
On May 4, the Bureau of Labor Statistics announced the unemployment rate for the month of April had fallen to 3.9%1—the lowest it’s been in nearly two decades.
The Fed, meanwhile, offered little indication that it means to alter its course of gradually increasing interest rates, signaling high confidence in employment trends. In its quarterly statement released two days before the jobs report, the Federal Open Market Committee reiterated its main goal is to promote both maximum employment and price stability.2
“The Committee expects that, with further gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace in the medium term and labor market conditions will remain strong,” the statement reads.
In other words, employment numbers are high enough to handle eventual rate increases, but the economy isn’t quite hot enough to suggest a quickened pace.
Nevertheless, some pundits think there might be more rate hikes than anticipated on the horizon. This scenario could create headwinds for the equity markets, with the important caveat that the financial sector would stand to benefit, as banks make money off of lending. Bond values would fall, resulting in investors experiencing principal losses, at least on paper.
On the other hand, some see weakness in the labor market, specifically around the anemic lift in wages.3
Furthermore, a steady decrease in labor force participation hints that the employment rate may not tell the whole story.4 Though April’s participation rate of 62.8% was down only slightly compared to previous months, it is significantly lower than the 67.3% rate seen in April 2000—the last time unemployment hit 3.9%.
So what is causing this downtrend? A large portion of the population reaching retirement age certainly doesn’t help. Neither does automation, which many see as a threat to future employment and wage growth.5 In addition, economists point to the opioid epidemic as a driver of some opting out of the labor market altogether.6
The resulting squeeze on businesses has been especially noticeable in industry-heavy Midwestern towns, some of which have begun to offer moving grants or student loan repayment programs to young people who are willing to relocate.7
From this perspective, the current economic situation could be too cold to support what is predicted to be two more interest-rate hikes this year. If that’s the case, and the Fed decides to continue a dovish policy, then equities markets could stand to benefit.
Cautious optimism seems to be the most common reaction to last week’s Fed statement and jobs report, and the stock market closed the week on a generally positive note despite slight overall declines for both the S&P 500® and Dow Jones Industrial Average. The Fed’s decision to keep interest rates steady meant no drastic change in Treasury yields. All told, the economy seems to be in a comfortable spot, and economic fundamentals are strong.
So if we truly are in a jobs economy that is just right, should we, like Goldilocks help ourselves to some tasty porridge and settle in for a nap?
As the fate of that young trespasser reminds us, complacency is dangerous. Volatility may well be the new normal, and since it’s anyone’s guess when we will reach the end of this current bull run, investors should remain vigilant.
It’s rarely prudent to make portfolio changes in response to any single piece of economic data. Instead, it’s wise to be mindful of one’s risk tolerance and portfolio makeup, rebalancing as necessary to keep aligned with targeted allocations. As we’ve previously noted, it’s times like these that can show the true value of diversification.
Further, though jobs data and inflation are important components of the US economy, they are not the only factors. They should be assessed within the context of other signals like GDP, CPI, housing, and a host of additional indicators economists and market movers alike digest.
Bottom line: Don’t become overly concerned with one or two market headlines in spite of the full economic picture, lest you find yourself, like Goldilocks, unprepared for an onslaught of vengeful bears.
1. “The Employment Situation—April 2018,” Bureau of Labor Statistics, 4 May 2018, https://www.bls.gov/news.release/pdf/empsit.pdf
2. “Federal Reserve issues FOMC statement,” Board of Governors of the Federal Reserve System, 2 May 2018, https://www.federalreserve.gov/newsevents/pressreleases/monetary20180502a.htm
3. Dmitrieva, Katia. “Tepid Wages, Participation Mute Celebration on U.S. Jobless Rate,” Bloomberg, 4 May 2018, https://www.bloomberg.com/news/articles/2018-05-04/tepid-wages-participation-mute-celebration-on-u-s-jobless-rate
4. “U.S. Economy Adds 164,000 Jobs in April,” Wall Street Journal, 4 May 2018, https://www.wsj.com/livecoverage/april-2018-jobs-report-analysis?ns=prod/accounts-wsj&ns=prod/accounts-wsj
5. Manyika, James, et al. “What the future of work will mean for jobs, skills, and wages,” McKinsey Global Institute, Nov. 2017, https://www.mckinsey.com/featured-insights/future-of-organizations-and-work/what-the-future-of-work-will-mean-for-jobs-skills-and-wages
6. DePillis, Lydia. “The opioid crisis is draining America's workforce,” CNN Money, 22 Feb. 2018, http://money.cnn.com/2018/02/22/news/economy/workforce-opioid-crisis/index.html
7. Harrison, David and Shayndi Raice. “How Bad Is the Labor Shortage? Cities Will Pay You to Move There,” Wall Street Journal, 30 April 2018, https://www.wsj.com/articles/how-bad-is-the-labor-shortage-cities-will-pay-you-to-move-there-1525102030