Why Jobs Don’t Sway Stocks

Jobs! According to many pundits, the Bureau of Labor Statistics’ (BLS) Employment Situation Report (aka, the unemployment report) is the biggest economic data announcement all month. For those who are unemployed and looking, that emphasis is understandable. But it also has many reading a lot into last Friday’s June release, like what it means for the economy, monetary policy—and stocks. For investors, we suggest tuning it out. Jobs data are backward looking, with little significance for markets.

There were several interesting tidbits,^[i] including the headline figures many cited. Nonfarm payrolls added 850,000 workers in June. Leisure and hospitality accounted for over 40% of the total, leading the way and continuing a string of strong gains since February.^[ii] That still leaves some ways to go before employment regains pre-pandemic levels. For perspective, nonfarm payrolls remain -4.4% below February 2020’s peak. Leisure and hospitality is -12.9% below then.

Meanwhile, June’s unemployment rate ticked up to 5.9% from May’s 5.8%, which may seem like it is heading in the wrong direction.^[iii] But that uptick stemmed from more people without jobs saying they sought work in the month. This increased the number of people the BLS deems unemployed versus “discouraged” and out of the labor force, boosting the unemployment rate. But it doesn’t mean a bunch of people lost their jobs.

Also notable, in our view: The BLS’s broadest measure of unemployment, the “U-6” rate, which includes discouraged workers and people employed part-time for economic reasons (those wanting full-time employment but unable to find it), dropped to 9.8% from May’s 10.2%.^[iv] While still above sub-7% pre-pandemic levels, the big drop into single digits—from April 2020’s 22.9% peak—suggests pretty dramatic improvement in the labor market.

No doubt, the employment picture remains far from ideal—as plenty of commentary points out. Millions are still out of work. Pundits link ongoing hiring difficulties to a dearth of childcare options, overly generous unemployment benefits and fears over COVID. For markets though, this is mainly sociology. Stocks focus on what affects future earnings—and how they compare to expectations, not well-known, backward-looking issues that have little impact on corporations’ profitability.

As for what it means for Fed policy, that is anyone’s guess, but don’t overthink it. The central bank itself seems uncertain. For example, policymakers don’t agree on whether currently low labor force participation rates are temporary or permanent. The Fed’s apparent befuddlement on what “maximum employment” means in this context supposedly affects the timing of its monetary policy decisions. But we don’t think there is any use trying to suss out how the Fed will respond. Fed officials are humans, subject to biases. They can and do change their minds a lot. Moreover, there is no preset market reaction to monetary shifts—bull markets routinely persist through alleged monetary “tightening.”

Beyond this, it is worth noting that while labor markets may have yet to recover fully, GDP is a hair’s breadth away. In Q1, GDP stood -0.9% below Q4 2019’s peak.^[v] That is, with significantly fewer workers, economic activity has returned to near normal. Employment doesn’t drive the economy—or sales and earnings, for that matter. Jobs follow economic growth, usually at quite a long lag. In turn, the economy lags forward-looking stocks, which can spy turning points months ahead.

Last year, stocks hit their low on March 23, before any negative economic readings hit, a month before the Bureau of Economic Analysis (BEA) announced Q1 2020 GDP tanked and seven months before Q3 2020’s GDP release showed recovery.^[vi] Nonfarm payrolls didn’t start turning up until May 2020 (which the BLS reported in early June 2020). The same goes for recoveries from the 2007 – 2009 and 1990 – 1991 recessions. Stocks troughed March 9, 2009, but GDP didn’t until Q2 2009 (which the BEA reported at July 2009’s end). Nonfarm payrolls didn’t start recovering until March 2010. In the early 1990s’ downturn, stocks troughed October 11, 1990. GDP didn’t until Q1 1991. Payrolls didn’t until June 1991. 2001’s recession was a tad different. In our view, the passage of the Sarbanes-Oxley Act prolonged the bear market past the shallow recession’s end. But still, jobs lagged them both. Payrolls didn’t hit their low until August 2003.

Stocks are a leading indicator, generally off to the races well in advance of any economic data, especially late-lagging labor reports. This may be little consolation for those running short-staffed businesses or struggling to find work—and we are sympathetic towards folks enduring those hardships. But for investors, it is worth remembering that jobs just aren’t the swing factor for stocks many think.