Today's Jobs Report Is Just Good News, Period
This morning, the much-anticipated jobs report from the U.S. Bureau of Labor Statistics was released, and it was a doozy! Non-Farm Payrolls increased by a massive 321,000 and that wasn’t the only good news. Both of the last two months’ numbers were revised upwards, hourly wages showed significant (0.4%) growth and the average workweek increased. Even U6, the measure of unemployment currently favored by those whose political leanings lead them to look only for bad news, fell. There was not a bad number in the bunch so, of course, with all that evidence of robust growth the major stock indices responded by falling.
To those new to this post-recession, Fed dominated U.S. stock market that may seem counterintuitive, but to those who have been paying attention for the last couple of years it is perfectly understandable. Traders are worried that such obvious signs of strength in the U.S. economy will lead to the Fed raising rates earlier than expected, and it is that fear that drove the initial reaction. As I said, perfectly understandable and in keeping with what has happened for some time now; understandable, but wrong.
Firstly, the Fed’s reaction is anything but guaranteed. Janet Yellen has made it clear on several occasions that, as should be the case, the Fed’s Open Market Committee will look at trends rather than individual snapshots when assessing both the labor market and inflation. The committee has also consistently asserted that rates will be increased slowly and cautiously. Yes, this number indicates some pretty good growth, but in the context of falling oil prices, underutilization in the labor market and stagnant real wages for most Americans for many years, it can hardly be seen as massively inflationary.
Secondly, even if it does lead to a change in at the timing of the Fed, will it really have that big an impact? Traders are pre-programmed to respond in certain ways to interest rate changes. If rates are increased, you sell oil, for example, on the assumption that those higher rates will restrict growth. In the wonderful self correcting way of markets the result of that, lower oil prices, compensates somewhat for the restrictive nature of a rate hike, encouraging growth. Oil prices, however, have fallen dramatically already, so the restrictive effect of any potential incremental interest rate rise will be muted at best.
To put it another way, with oil and therefore gasoline prices falling and stagnant wages leading to an ever widening wealth gap, there is plenty of slack left in the U.S. economy. From a global perspective, the problem faced elsewhere, notably in Japan and Europe, is not inflation, but the opposite. For that reason an increase in short term U.S. rates will not be followed by similar increases in other developed nations, resulting in no knock on effect on global growth.
This thing of good news for the U.S. economy being initially greeted by a wave of selling is beginning to look more like a habitual response than a rational one. Think back a year, to when good numbers raised fears of an end to QE and the initial reaction was usually a selloff, or a hesitation at best. That particular fear has now come to pass and look at where we are now - new highs in equity markets.
With each passing month and quarter it becomes more and more obvious that the same trend, of a slow recovery that is gradually picking up pace, is intact. With inflationary pressure extremely low and being reduced even further by falling oil prices, the Fed has a rare luxury. They can delay interest rate rises for a while and yet be fairly confident that when they come the economy will be strong enough to absorb them. This allows for normalization without a major shock.
For investors, the implications of this are fairly obvious. Ignore the initial downward reaction to good news or, if anything, use it as an opportunity to buy at a relative discount. As to what to buy, there is one significant pointer from all of the above. Interest rates will increase at some point, maybe sooner than previously thought. This may not damage the economy, but it will lead to continued dollar strength, a trend which will hurt exporters. Importers and those focused on the U.S. can therefore be logically expected to outperform. Retail, road and rail transportation and healthcare services could all be sectors that benefit in that scenario.
Like the saying goes: “Sometimes a cigar is just a cigar,” and sometimes a good jobs report is just good news, period.