First, let's
focus on the good news and what it may mean. At the beginning of 2015,
there were 3 million more Americans at work than the year before. The
unemployment rate had fallen to 5.5%-a level that economists at the International Monetary Fund had projected that the U.S. wouldn't achieve until 2018 at the earliest.
Then came the U.S.
Bureau of Labor Statistics report for February, which showed a
seasonally-adjusted increase of 295,000 jobs (nonfarm payroll
employment), well ahead of projections. America has not only pulled out
of the long unemployment slump triggered by the Great Recession; it is
now creating jobs faster than at any time since 2000, roughly equal to
the go-go economy of the late 1990s. The government report noted that
there are 1.7 million fewer unemployed persons today than there were at
this time last year. More importantly, perhaps, there are 1.1 million
fewer people in the "long-term unemployed"category, which is now down to 2.7 million overall.
How can this be
considered bad news for U.S. stocks? There are three possible
explanations. First, the labor markets may be creeping toward that place
where businesses have to compete for talent and pay their workers
higher wages. When payrolls go up, it eats into corporate profits. There
is little direct evidence this is happening yet-overall,
wages are up just 2% in the past year, roughly even with inflation. But
there are reports that small business employers have more unfilled job
openings than at any time since April 2006. Meanwhile, the average
workweek is inching up, which suggests that companies need people at
their desks longer than they did before.
If the unemployment rate hits 5.4%-which could happen this Spring-then our economy will have reached what Federal Reserve economists consider to be "full employment."This,
of course, does not mean what those words actually say; it is a coded
way of saying that the balance of negotiating power will have started to
shift from employers to workers.
Reason number two
is bond rates. While stocks were tumbling last week, bond yields were
moving in the opposite direction in what was described as the biggest
one-day selloff since November 2013. The yields on 10-year Treasuries
rose from 2.11% to 2.239% in a single day. As bonds become more
competitive with stocks, demand for stocks goes down-and
so do stock prices. Interestingly, the stocks with the highest
dividends tended to be the biggest losers in the selloff, suggesting
that some investors who were temporarily relying on stocks for income
are shifting back to bonds.
But perhaps the biggest reason for the market's
angst is concern about the next move by Federal Reserve Board. Fed
chairperson Janet Yellen has made it clear that the health of the U.S.
labor market will factor into her decision on when to finally allow
short-term interest rates to rise. The good unemployment news could
accelerate that schedule; at the worst, it probably confirms the current
unofficial timetable of graduated rise beginning in June. For the
impact that would have, go back to reason number two.
How credible are these three concerns? Should we be worried? It's
helpful to remember that higher employment means more money in the
pockets of consumers, which can trigger a virtuous circle of more
spending, more corporate revenues, a healthier economy. We've
learned from past experience that the stock market is easily spooked by
shadows and headlines, by good news as well as bad news. Bond rates are
still pretty low compared with historical numbers, and the possible
threat of higher payrolls is not exactly the same as seeing them show up
in the actual workforce. (Remember those 2.7 million long-term
unemployed workers still searching for any kind of a paycheck.)
Short-term
traders, who measure their investment horizon on the second hand of
their watch, can panic if they want to. Those of us who measure our
investment horizon with a calendar should be celebrating another
milestone in the U.S. economy's long and fitful recovery.
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Sources:
http://www.bls.gov/news.release/empsit.nr0.htm
http://www.reuters.com/article/2015/03/06/us-usa-economy-idUSKBN0M20E620150306
http://www.economist.com/blogs/freeexchange/2015/03/americas-jobs-report?fsrc=scn/tw/te/bl/thewinningstreakcontinues
http://www.bls.gov/news.release/empsit.nr0.htm
http://blogs.wsj.com/economics/2015/03/06/economists-react-to-the-february-jobs-report-full-employment/
http://www.nasdaq.com/article/stocks-tumble-as-dollar-bond-yields-soar-on-us-jobs-report-20150306-00624
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Sincerely,
Bill Morrissey, CFP® and Tammy Prouty, CFP®
Sound Financial Planning, Inc.
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