Why Are Stocks Higher After Such a Bad September Jobs Report?
Today is jobs day, not Steve jobs, but actual jobs. It is the day when the Bureau of Labor Statistics (BLS) releases the employment report for September. For traders, jobs day is always big. It is big enough, in fact, that when I was working in Tokyo, we would all come back to the dealing room on that day each month at 9:30 PM for the numbers and stay for at least a couple of hours, even longer if the numbers were anything other than “as expected”.
Back then, though, the meaning of a surprise in the figures was clear cut. A weak report was bad for the U.S. economy, and therefore bad for stocks, the U.S. dollar and industrial commodities. Meanwhile, a strong number was always good news for all of the above. Now, however, that relationship isn’t as clear.
Obviously, less hiring in the economy than anticipated, as indicated by a lower-than-expected non-farm payroll (NFP) number, is not a good thing in a general sense. Economic growth ultimately drives stocks higher, and that is, at least in terms of conventional wisdom, hard to achieve when hiring is weak. In the current environment, though, a disappointing jobs report cannot be taken as a trigger for a selloff.
What often happens in that case is what we saw this morning. NFPs were expected to come in at around half a million but hiring in September actually totaled only 194,000. And yet, the chart for the S&P 500 E-Mini futures contract (ES) for thirty minutes either side of the release looks like this:
There’s some initial volatility, but half an hour after the numbers came out, ES is trading just slightly higher than it was at 8:29. That seemingly inverse reaction is being copied elsewhere too. Oil, for example, is trading significantly higher than pre-release levels.
For that to happen, one or both of two things must be true. Either the headline number is misleading and there are other things going on in the report, or the weak number must suggest something else is likely, something where the bullish influence of the expected action is more powerful than the impact of a low hiring rate last month. In this case, it is both.
The misleading thing is that almost all of the miss is explained by a very weak public sector number. Government payrolls declined by 123,00 last month, whereas the private sector added 317,000 jobs. The fact that the public sector losses were concentrated in education makes me pause, because a return to school is essential if we are ever to fully recover from the economic impact of Covid-19. But more broadly, a shift from public to private employment is a good thing for corporations, and therefore stocks.
Then there is the effect of the end of enhanced unemployment benefits. Last month’s payrolls were expected to be inflated as all of the people who had been taking those enhanced benefits were forced back to work by the prospect of them sunsetting. Clearly, that didn’t happen, so maybe the initial assumption that there was a massive hoard of lazy moochers who chose not to work was flawed in the first place. There is a labor shortage, but it seems to be more about demographics and wage levels than laziness. That suggests higher wages, which in turn places disposable income in the hands of consumers.
The downside to that, though, is that it is inflationary. That might be seen as reaffirming the Fed’s intention of winding down QE and raising rates before long in some ways, which would be a negative for stocks. However, the overall weakness of the jobs report actually makes that less likely. It may not be quite weak enough to prompt an immediate about turn from Jay Powell, but it will make him a bit more cautious than he was and that alone will be cheered by traders.
This report will also be used as proof that despite a relatively good recovery and a strong stock market, fiscal stimulus in the form of a big spending bill is still needed. The compromise spending bill that has been agreed upon now is thus more likely today than it even was yesterday, bringing the prospect of simultaneous monetary and fiscal stimulus into an economy that many would argue is showing understandable, temporary weakness. Oh, and by the way, that will also boost public sector hiring.
You can argue that it shouldn’t be this way if you like. You can say it is distortion, or leading to dangerous debt levels, or is putting us on the path to uncontrollable inflation or is further enriching equity owners at the expense of workers or any number of things. You can say all that till you are blue in the face, but I was taught early in my dealing room life that traders have to trade based on what is, not what they think should be.
On that basis, a weak jobs number that has prompted buying rather than selling tells you that traders are more concerned about free money and forced growth than they are about short-term fundamental economic strength. And as both of those things are more likely today than they were yesterday, this weak report is actually bullish for the market.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.