Assessing US Data in Midterms’ Aftermath

America’s jobs market smashed October expectations. US consumers’ moods improved slightly, too, though concerns persist. Stocks have bounced wildly. To many, it may look like a striking disconnect. But when you weigh the data, it becomes clear these nuggets aren’t really conflicting—worth keeping in mind as investors navigate a noisy environment. 

First, the October jobs report. America’s nonfarm payrolls rose by 165,000, vastly outpacing expectations of 65,000.^[i] Of 14 industries, 9 added jobs, led by professional and business services.^[ii] The unemployment rate ticked down to 4.1% from September’s 4.2%.^[iii] August and September’s hiring were also both revised up by a combined 84,000 jobs..^[iv] Overall, not a lot to pooh-pooh. No wonder analysts admitted it was, “… just all round a really strong reading … you really have to squint to find weakness.”^[v]

Separately, the University of Michigan’s widely watched Consumer Sentiment Index rose three points to 51.0, a three-month high but still near historical lows. Expected personal finances and business conditions improved modestly, though concerns (e.g., cost of living and a possible AI bubble) remained.^[vi] In contrast to jobs and improving moods, markets had a topsy-turvy week. Stocks jumped on Wednesday, plunged on Thursday and stabilized today—though most are still harping on Thursday’s selloff, and the past few weeks haven’t been stellar. Taken in tandem on a Friday, these figures may seem to contradict each other.

But the data don’t tell conflicting stories—rather, they simply share different information. Employees represent a business’s human capital investment. Employers don’t tend to hire or fire on a whim given the associated costs and resources. So if economic times get tough, a company probably pulls other levers (e.g., reducing growth-oriented spending) before letting go of employees. Likewise, during expansionary times, business owners usually hold off on hiring until they can’t meet demand. This means economic growth creates jobs, which makes jobs data lagging economic indicators. They reveal past growth (or contraction), not what lies ahead.

As for sentiment, many see moods as predictive. For instance, glum folks are supposedly less likely to shop—knocking broader spending. But this overlooks consumer spending’s resilience. And the past few years’ experience, as spending rose while sentiment plumbed near-record lows. More importantly, moods are fickle and biased. Retail therapy is a cliché for a reason. Sentiment surveys may record how respondents feel in a moment, but those feelings vacillate. Someone may read a depressing news story and feel down about the world. But the next day, a happy headline or serendipitous personal experience^[vii] can leave that same person feeling downright chipper. That shift could alter their responses to the same sentiment poll!

Another survey shortcoming: Personal biases skew perceptions. We have shown before how partisan sentiment affects people’s economic views, and recent research further highlights this skew. Going into 2022’s midterms, the University of Michigan found just 1% of Republicans (and 56% of Democrats) said Democrats would be better for the economy.^[viii] Going into this year’s midterms, that percentage wasn’t much different for Republicans (6%), whereas 87% of Democrats thought their party was superior for the economy.^[ix] These folks all experienced the same economy, inflation and cost of living challenges over the past four years. Yet their party biases colored their views.

So jobs record what already happened. Consumer surveys are at best a potentially dodgy coincident indicator. Stocks, by contrast, focus on corporate profits over the next 3 – 30 months. They are the ultimate leading economic indicator. They digest all widely known information near instantaneously, including companies’ hiring decisions and moods and opinions of those data. However, stocks aren’t perfect, either. In the short term, they can be extremely volatile, subject to sharp daily jolts (up or down) for any or no reason. For investors, this means not treating what happened in the past day, week or month as predictive. Sentiment rules the day over the short run, and there is no predicting how human emotion can flip—as this week has demonstrated.

Rather than treat any indicator as all-telling or useless, focus on what these data can tell you and acknowledge what they can’t. Take jobs. They won’t predict where the economy or stocks are headed. Nor will the jobs report signal anything people’s future behavior (e.g., how analysts assess the Fed’s next monetary policy move based on the latest unemployment trend).

However, jobs report coverage can hint at how sentiment compares to reality. Back in January, we pointed out how headlines fretted over rising part-time work. The focus on subjective job “quality” overshadowed overall US jobs market growth. To us, that was evidence of lingering skepticism. Today, many analysts acknowledge a solid October jobs report (some gripes over slowing wage growth notwithstanding)—an overall rational optimistic take.^[x] These qualitative discussions are also arguably more telling about sentiment than a skewed survey of consumers that hasn’t reflected real economic conditions for years.

The latest economic and market data seem to reflect midterm noise. But when you take a step back, there don’t seem to be conflicting messages here. US jobs growth matches its longer-running trend. Consumer sentiment remains well below its long-term average. Stocks are volatile in the short term. Recognizing those benign realities can help investors see the world isn’t radically different today than it was a week ago—and keeping that perspective can assist with staying disciplined during bouncy times.