May’s Employment Report: A Snapshot of Sentiment

Jobs. Or maybe, given the new record-high US payrolls and fourth solid month of growth in a row in May, that should be, “JOBS!” But a curious thing happened on the way to popping a cork and celebrating the recovered labor market. The general reaction to the report was a shrug and, frequently, a “yeah, but.” However, this is the reaction you want if stocks are your primary interest—this illustrates skepticism remains, implying the bull market has significant distance yet to run.

Total nonfarm payrolls rose by 217,000—the fourth consecutive monthly gain of 200,000 or more since the late 90s. They also surpassed the pre-recession peak—just like private payrolls did in March—regaining all of the jobs lost in the recession plus an extra 98,000, while the jobless rate and the labor force participation rate remained unchanged at 6.3% and 62.8%, respectively. The U6 unemployment rate—which tracks all unemployed, underemployed and those marginally attached to the labor force came in at 12.2%—down fully 5 percentage points from its 2010 peak.[i]

Them’s the facts. Now, things could be better, to be sure. However, this is a fairly solid report. Yet it’s being met with no shortage of “yeah, buts”—symbolizing lingering skepticism. Here are a few: Jobs are growing at a similar rate as the late 1990s, but today’s US economy is much weaker. Jobs are growing too slowly. We’ve regained all the jobs since 2008, but the nation’s population has risen significantly (a fact, but also an inevitability after every recession). Jobs are growing but wages are still weak. Which is basically because the jobs added lack quality—they’re what were once called, “McJobs.”^[ii] And yes, private sector jobs have recovered, but public sector jobs still lag. The list goes on.

And we haven’t seen these just when it comes to employment. Take the UK’s Q4 2013 GDP—a solid reading, but headlines still bemoaned an “unbalanced” recovery. Or the eurozone flash PMIs released in February—they mostly grew but the “skeptical camp” still focused on slower rates of expansion. These “yeah, but” caveats show many, if not most investors, can see at least some positivity but maintain lingering doubts about certain aspects of these data. People are much more optimistic today than when the bull first began, but they aren’t close to euphoric.

In 2009 and early 2010, all news was bad. On the rare event good news made headlines, it was couched as bad or (allegedly) about to morph into something bad—the pessimism of disbelief. For example, folks then thought government spending was the only thing keeping the economy from a further leg far down, yet the debt would soon become unmanageable—sowing the seeds of a crisis of epic proportions. And that was only if these folks thought the economy wasn’t still falling after the expansion began. Many pessimists simply refused to acknowledge positive news. Or they’d latch onto negative factors—yes, like employment—that are typically late lagging to bolster their negativity. Positive outlooks were rare and mocked. But if a person played to the audience and said something negative—even if it lacked a single shred of supportive evidence—folks would chime in with support. Expectations were far below reality—but that meant plenty of positive surprise power ahead, pushing markets higher.

This pessimism is a thing of the past, but that’s all part of the natural evolution of sentiment in a bull. At the depths of a recession, despair dominates. But as stocks climb and the economy recovers, folks’ feelings perk. At first, they are likely timid and very skeptical. Then more optimistic. All is a run up to the top, when worries evaporate to nil, media speculates about end of the boom-and-bust cycle and further growth and bull market seems all but assured. Those who foresaw doom earlier are publicly mocked in media.

Euphoric folks tend to “yeah, but” negative news, not positive. All those “yeah, buts” about jobs exemplify still-lingering skepticism. Euphoria won’t be here until these skeptics capitulate. You can see their continued presence in all the searching for meaning hidden in flat stocks, falling bond yields and non-volatile volatility gauges. You can see it in theories valuations are too stretched. You can see it in coverage of low inflation paired with growth that claims this is bad, despite the fact inflation isn’t a leading economic indicator, it’s the after effect of one (the money supply). Expectations are still lower than reality. The gap just isn’t as wide as it was in say, 2009 or 2010. What’s more, reality is still positive—growth remains and seems likely to continue. The trouble with euphoria is folks are often blinded by false positives to the actuality of very real, very big negatives. We don’t have either ingredient today.

The reactions to Friday’s jobs report are illustrative of sentiment’s evolution. And the lingering skepticism tells us the bull likely has plenty more room to continue.