March’s Jobs Jump Is Noise for Investors

After February’s lousy jobs report, many awaited last Friday’s March release with bated breath. When it hit—and hiring rebounded—that bated breath turned into a sigh of relief. Some claim this report was just what stocks needed—a bullish fillip. In our view, this is off. Cheer the figures if you like, but jobs data, good or bad, are backward-looking and reveal nothing about where forward-looking stocks go from here.

The attention-grabbing figure from March’s “Employment Situation Summary”: Nonfarm payrolls rose 196,000, beating expectations for 173,000. That was a big rebound from February’s originally announced 20,000 (revised up to 33,000 in March). Elsewhere, the widely watched unemployment rate (also called the U3 rate) was 3.8%, unchanged from February. Private sector wage growth slowed a tad from 3.4% y/y to 3.2% y/y. Overall, the latest numbers were fine—neither spectacular nor awful.

Exhibit 1: The US Continues Adding Jobs

Source: FactSet, as of 4/8/2019. US monthly new nonfarm payrolls, seasonally adjusted, January 2014 – March 2019.

Yet media treated the March release as if it was just the helpful jolt the economy and stocks needed. One article argued “stock investors should love this jobs report.” Some said the positive data “show that the economy continues to expand, reducing recession fears.” Others noted the jobs report “should prompt sighs of relief” from the Fed, whose members don’t seem keen on facing calls for rate cuts.

We think the hubbub overstates late-lagging economic data’s significance. Jobs reflect hiring decisions businesses made based on months-old economic results. Think of this from a business’s perspective. Hiring and training a new worker is a costly, time-intensive endeavor that impacts productivity and profits. Firms will likely do with what they have until they absolutely need to hire. On the flipside, businesses are usually reluctant to let go of workers and squander investment. These staffing decisions tend to follow the economic cycle—not lead. Thus, jobs data tell you little about businesses’ prospects or decision-making to come, which is what stocks care about most.

For some recent historical context, consider: The bull market started in March 2009. The US expansion began that July. Yet nonfarm payrolls shrank for most of the year. However, investors’ feelings have trailed even jobs data. Early in the bull market, financial media frequently warned the US recovery was on shaky ground—an artificial “jobless recovery.” Later, as positive nonfarm payrolls steadily rolled in, some still feared hiring was too slow and unemployment too high. Over the years, sentiment towards jobs data has warmed, albeit at a snail’s pace, with lingering angst over issues like supposedly sluggish wage growth even as skepticism over employment faded. Only now do most finally see growthy jobs data as evidence of US economic strength—even though the data haven’t much changed in years. 

In our view, this could hold interesting implications for the future. Should the bull die because it finishes climbing the proverbial “wall of worry,” it wouldn’t surprise us if investors were to cling to still-rising jobs as a reason for optimism—even as a bear market begins. It is what we called “the Employment Sentiment Trap” here years ago. It wouldn’t shock us if that eventually happens. We don’t believe we are there yet, as the bull still has fuel to charge higher and sentiment remains far from euphoric. But it is a scenario worth keeping in mind as the bull grinds on.