Thoughts on A Shocking and Confusing Jobs Report

The January jobs report was released this morning, and it was a shocker. The U.S. economy added 467,000 jobs last month. That number in itself is not shocking. We have become accustomed to big Non-Farm Payroll numbers during the recovery from the initial Covid shock, but the circumstances here were completely different. This came in a month when omicron was running rampant through the country, causing analysts to predict a much lower, or in many cases a negative, print.

Analysts and economists getting something wrong isn’t that big of a deal either. In these circumstances, however, adding nearly half a million jobs in January also flies against basic common sense, not just because of omicron, but because the labor market was already tight. I usually put more weight on the market reaction to data than on the data themselves but, in this case, that reaction doesn’t tell us much either. Traders and investors were clearly confused by the jobs report. Stock index futures fell initially, before jumping back to around flat just a few minutes later. Obviously, such a big number shows a strong economy, but what does it mean for interest rates? Will it encourage the Fed to hike faster and further? Or is it just a continuation of something that was already evident, and which they are already factoring in?

The recovery in futures after a brief period of consideration suggests that traders think it is the latter, but there are things going on elsewhere in the world and other parts of the report that say otherwise. From an interest rate perspective, it comes at a time when the Bank of England has just raised rates and even the historically slow-acting ECB is under pressure to do the same. Interest rates are not a competitive game, but if the rest of the developed world is acknowledging inflation, it adds to the narrative that the Fed is behind the curve on this and needs to act quickly and decisively.

That narrative is strengthened even more by another data point in the report, too. Wages surged in January, gaining 0.7% on the month and 5.7% on an annual basis. Wages are an important part of inflation, as they have two effects: They increase costs for businesses, forcing them to increase prices, while simultaneously putting more money in consumers’ pockets, which in theory should enable them to pay more for goods and services, but if prices keep going up, then the amount of money in their pockets means less, thus forcing more pay raises, which then force more price increases, and so on and so forth.

That all sounds quite dire and certainly suggests that the Fed may be forced to raise interest rates sooner and by more than they have so far planned. If they do, there is a good chance that the losses we saw in January would be just the beginning. There is, though, another way of looking at it.

Maybe it shows that the economy really is strong enough to take three or four rate hikes in its stride, even if one of those hikes is by more than the anticipated twenty-five basis points. In fact, if anything, one or one and a quarter percent over the next year could be beneficial. It would enable consolidation as things slow just a bit, without knocking growth too much.

The problem is that, right now, the data and market reaction don’t make it clear which of those two interpretations reflects what is happening or what is expected to happen. Confusion reigns. That is an unsatisfying conclusion for pundits like me, but also for traders and investors. One of the main lessons that a lifetime of trading has taught me, though, is that it is important to deal with what is, not what you think should be, and this is a case in point.

It is natural to seek clarity and order, but that isn’t always possible. If we accept that and understand it, then we must simply adjust to conditions as they are. That means that there will be volatility that creates opportunity, but it will be best to avoid excessive risk while seeking to take advantage of that. There are two ways for investors to do that and handle a confused, volatile market.

You can buy index futures and quality, large cap stocks on big down days, while resisting the temptation to do the same on big bounces, and then riding out the storm until a long-term direction is clearer. Or you can turn off the business news, close your computer and come back to your portfolio when it looks a bit better. Whichever of those options you choose, though, understand that every data point right now has two interpretations, so the volatility is far from over.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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