Bad News Is Good News – Until It's Not
The latest jobs numbers... What the whip of a 'long and variable lag' feels like... Bad news was good news – today... It was not happenstance... Fodder for a Fed 'pause'... The impact for stocks...
The jobs market may finally be 'cooling off'...
Today, we saw a substantial economic report suggesting the jobs market may finally be weakening to the point where it matters...
The U.S. had 8.8 million job openings at the end of July, according to the latest report from the Labor Department. That's down from almost 9.2 million a month earlier.
This is the fewest job openings in almost two-and-a-half years and well off the 12 million peak from March 2022. Perhaps not coincidentally, that's when the Federal Reserve began finally hiking interest rates to "fight" inflation.
The same Job Openings and Labor Turnover Survey ("JOLTS") report today showed fewer people quitting their jobs than we'd seen since early 2021. This suggests more and more people, on balance, are holding onto their existing jobs rather than chasing increasingly lucrative new job offers – an inflation driver.
Today, there are just 1.5 job openings per unemployed person actively seeking work... That's the lowest ratio since September 2021, and it's inching closer back to a pre-pandemic "normal."
Put together, these numbers show a weakening economy. It's likely feeling the whip of those hard-to-predict so-called "long and variable lags" of tighter monetary policy, which intended to slow the economy without killing it – "intended" being a key word.
Perversely, this is good news for the markets today...
You and I (Corey McLaughlin) may see bad news in fewer job openings and fewer opportunities to get a better job. And for everyday people in the workforce, yes, this is a turn for the worse. But for folks at the Federal Reserve who pull the strings on the cost of dollars – and many investors in the markets – this economic pinch is cause for celebration.
That's because it means the Fed may not have to raise interest rates as much to keep "fighting" inflation. And lower rates generally benefit the "stakeholders" in our debt-based economy.
We've talked for more than a year about the macroeconomic scenario facing the U.S. economy: inflation at decades-highs... unemployment near record lows... and a Fed raising interest rates and making dollars more expensive throughout the system.
The official inflation data since last summer has told a story of price growth slowing down (though with prices still going up, of course) while the Fed keeps hiking rates. That's because with millions of open positions, the jobs market in central-banker parlance remains "tight."
As we've said, when inflation is still above "normal," the Fed will keep raising rates until the job market shows substantial weakness. And any further hikes that catch the market by surprise could be a headwind for stock prices and growth expectations.
But if the labor market shows signs of weakness and, importantly, the pace of inflation continues to slow (not a guarantee), the Fed would be more likely to "pause" or stop its rate hikes. This would be good news for stock prices, on balance, as we wrote recently.
The Fed's next meeting is September 19 and 20, assuming its members can find their way through the clouds using the stars to get there.
A pause in rate hikes has historically been favorable for stock prices...
As Stansberry Research senior analyst Brett Eversole explained back in a May issue of the free DailyWealth e-letter, and we re-shared earlier this month...
Remember, the stock market is a forward-looking machine. It prices in whatever we expect to happen over the next six to 12 months.
Because of that, buying when the Fed pauses rates is a smart bet. The table below shows what happened a year after each pause in the rate-hike cycle over the past four decades.
We've seen six other rate-hike cycles in the past 40 years. In five of those cases, stocks were dramatically higher a year later. And the average gain was an impressive 19.5%.
Again, this is the bigger-picture stuff, not about any particular stock. Different companies will weather the environment in different ways. And there's a notable exception in the list above in 2000 when a pause didn't do much good for stocks and more downside was ahead.
But we talk about this so much because it provides a backdrop for the market as a whole.
This is what we saw today...
Right after the latest jobs data was reported at 10 a.m. Eastern time, each of the major U.S. indexes surged higher. It was not happenstance.
The benchmark S&P 500 was up a little before the report, then finished 1.4% higher today after it. It was the index's biggest one-day move higher in more than a month.
The tech-heavy Nasdaq Composite Index behaved the same but better, closing today 1.7% higher. The small-cap Russell 2000 was also up more than 1%. The Dow Jones Industrial Average lagged but was up 0.8%.
The S&P 500, Nasdaq, and Dow also moved above their 50-day moving averages, a technical measure of a short-term trend, for the first time in two weeks. This suggests that the correction we've seen in August could be near its end rather than a middle.
We will see... If this theme continues, we'll know soon.
The latest personal consumption expenditures ("PCE") index report – the Fed's preferred inflation gauge – comes out Thursday. And a different jobs report with an updated unemployment rate for August will be published Friday morning.
In any case, 'bad news' will eventually become bad news for stocks, too...
A weakening job market is good news – until those job openings drop so much that they turn into job losses and the unemployment rate rises... or this environment eats into companies' profits and outlooks.
At that point, the Fed will likely be inclined to cut rates over fears that the economy needs help. Stock prices could be sliding ahead of that move, sort of like what just happened over the past few weeks with respect to the Chinese economy. The Chinese central bank has been intervening with stimulus as growth has stunted.
Here in the U.S., things are actually going better...
It has taken a while to get to this point, from 12 million job openings to just under 9 million... It may take a similar long time for the 9 million openings to dwindle to a point that marks the next big turning point in policy for the Fed, too, where it would step in for a rescue.
At the moment, futures traders are betting that the central bank won't start cutting rates until June of next year. That's the latest timing I've seen since the whole rate-hiking cycle began.
Though let's note: These same traders were expecting cuts early in 2023 at one point. So, of course, the consensus expectation in the market for the U.S. economy can also change quicker than anticipated – for better or worse.
But for today, at least, bad news was good news.
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In today's mailbag, feedback on yesterday's Digest in which we talked about Federal Reserve Chair Jerome Powell's latest comments on sailing by the stars when making monetary policy... plus a reply to a piece of mail from yesterday... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Corey, After reading your article and Jerome Powell's comments I am more convinced than ever that Ron Paul is correct. The entire Fed needs to go away. It really is that simple. His [Powell's] prognostications are consistently off target and we cannot afford to have this knucklehead, (or any other), monkeying around with rates and 'monetary policy', which always costs the taxpayer more as inflation continues to wreak havoc on the economy. What value does the Fed add to the economy? None that I can see.
"I'm sick to death of this 800-pound gorilla called the U.S. Government constantly getting more and more involved in every single aspect of our lives. The Fed is just one example. Now they're talking about a 'FedCoin' digital currency. That is the ultimate nightmare scenario and will also spell the end of any freedoms we have left! Good Grief, when does this catastrophe end? Hope you have a great day, and thanks for your insights. Always appreciate it." – Subscriber Warren W.
Corey McLaughlin comment: Thanks, Warren. Appreciate the feedback. I'm similarly bearish on the ability of the U.S. government to govern.
"Hey Corey, Also [on] your comments on Powell navigating by the stars, last month Powell said he wasn't going to tell Congress to stop spending because it isn't his job. Well, whose job is it? That is his job. That's why the central bank is independent of Congress." – Subscriber Neal W.
McLaughlin comment: Good points!
"The Fed's 2% inflation target is so important and subscriber R.M.'s explanation of its origin is so spot on that I think you should publish any additional emails seconding what R.M. wrote. So I offer this: 'Bingo!'
"My comments: This explanation is something that can be pieced together from an undergraduate economics course or two, as R.M. implies. But it does require at least that limited background and some critical thought about various topics covered in those classes.
"Therefore, it could very well be that Powell doesn't actually know the origins of the target. He has an undergraduate degree in politics, a law degree, and a career in investment banking. By the time he came on board at the Fed, he'd probably heard the 2% target bandied around so much that he might not have thought twice about asking about its origins – or might have felt stupid if he did. (As R.M.'s explanation shows, Powell actually would have been stupid for not asking, if he didn't know.)
"As for Yellen, she has a PhD in economics and was an economics professor, so maybe she felt some need to hide the explanation. Or maybe her economics mind just turned to mush from all that 'high-level' economics stuff involved in being an economics professor. She'd just go through the motions doing her unimportant duties – like teaching undergraduates how the Federal Reserve system works – and hustle back to her office to the important work of doing the obscure research that economics PhDs so love doing." – Subscriber S.G.
All the best,
Corey McLaughlin
Baltimore, Maryland
August 29, 2023