What Reactions to the Jobs Report Say About Sentiment

Last Friday, the Bureau of Labor Statistics (BLS) reported nonfarm payrolls declined in December for the first time in seven months, and a curious thing happened: People didn’t freak out. Sure, there was some pessimism about the very near term in light of renewed lockdowns in several states, but the tone was largely positive, with many focused on the longer term—a rather abnormal reaction so soon after an economic contraction’s (potential) trough. In our view, this is the latest example of how rapidly sentiment has shifted from pessimism to optimism over the past few months, which we think is telling about where we are in the market and economic cycle.

Nonfarm payrolls declined -140,000 in December, much worse than the 100,000 gain economists expected.^[i] Normally, a dreary jobs report so close to a recession’s depths has many ringing alarm bells. In the expansion that began June 2009, nonfarm payrolls didn’t start rising until March 2010.^[ii] Sentiment was uniformly pessimistic through these three quarters, sparking talk of a “jobless recovery” and a “double dip” inviting extended recession. Payrolls’ initial bounce was swift, with a 952,000 rise in 3 months. But then it took a step back, with payrolls dropping a bit for four straight months. In this stretch, coverage included statements like: “Even without a full-blown double dip in the economy, the recovery thus far has been so anemic that the job picture seems likely to stagnate, and perhaps even get worse, in the near future.”^[iii] Economists projected a permanent plateau of “9-plus percent unemployment even through the next presidential election” (which, at the time, was over two years away).^[iv] About the best financial commentators could muster around then: “Consumer Sentiment: No Longer Selling Kidneys.”^[v]

By the time payrolls broke even in May 2014, sentiment had warmed from deep pessimism to mild skepticism. Pundits acknowledged the milestone, but many still pointed to the stubbornly low labor force participation rate and anemic wage growth to argue the real unemployment rate was far higher than reported and whatever jobs we created weren’t “good jobs.” They alleged the economy continued to suffer from “secular stagnation,” a “skills gap” and “malaise.” Not until the end of 2014 did headlines begin looking at the bright side: “The Jobs Report Is Even Better Than It Looks,” to note one.^[vi] Apparently, the recovery was finally “gaining steam” and the labor market outlook was “sunnier.” By 2017 or 2018, more people were pointing to the historically low unemployment rates and growing chipper about the improvement. Even in January 2020, the labor market was considered a bright spot in the US economy. From the end of the last recession, it took years for sentiment towards jobs to cycle from pessimism to skepticism to optimism. But even over the next several years, we never really hit a point where pundits were positively salivating over potential gains to come over the next several months or beyond.

Today, while some skepticism lingers, many economists picking through December’s jobs report accentuated positives despite the big headline miss. They noted the BLS revised the prior two months’ nonfarm payrolls 135,000 higher. Many pointed out that the job losses occurred almost entirely in leisure and hospitality due to COVID containment efforts; other areas such as professional and business services and retail trade saw strong growth. Some also highlighted a marked decrease in permanent job losers.

Economists’ projections are also sunnier. They cast last month’s downturn as temporary and anticipate a jobs recovery with vaccines and more “stimulus” potentially on the way. As one headline remarked: “The December Numbers Were Awful, but the Economy Has a Clear Path to Health.”^[vii] We think this is another sign we are probably later in the economic and market cycle than most coverage suggests.

From 2020’s depths, pessimism shifted rapidly to optimism in mere months—unusual in a new bull market. Sentiment usually grinds higher over years, as the last expansion showed. In our view, this is more evidence stocks are behaving as if last year’s bear market were a correction rather than a reset of the market cycle. They are acting like this is the maturation of the bull market that began way back in 2009. This reminds us of how quickly sentiment flipped after the Asian Financial Crisis in 1998—it wasn’t a fear the double dip moment, but a buy the dip one.

Optimism is a stiff tailwind late in bull markets. It tends to linger quite a while before euphoria takes hold, and then euphoria can reign for quite a while more before a peak. So, optimism now isn’t a reason to run from stocks, in our view. But we think it does mean sentiment bears watching and underscores the importance of keeping rational expectations—guarding against greed from leading you astray.