Another rate cut by the Fed, continued optimism for a trade deal, and a job market that continues to expand all have propelled stock indexes to make further all-time highs.
Whatever concerns we have had about the bear market ending, employment statistics haven’t been one of them. We might be late in the current cycle or at some stage of mid-cycle, but employment figures are at the top of their game and continue to improve.
While the unemployment rate rose slightly from the 50-year low of 3.5% in September to October’s 3.6%, even this was a positive, as we saw quite a few more people enter the workforce, and overall employment numbers were up again. The employment market remains very robust and stocks responded to Friday’s very positive jobs report with another up day, sending the broader S&P to yet another all-time high.
Those who told us to get out of stocks earlier in the year because they felt that we were at the end of the bull market simply made a guess, and one that turned out to be a bad guess. Traders and investors alike will often grapple with the urge to take profits after a good run and one that now has more risks to the downside, but this should never be a guess and we at least need to wait until the fears materialize to act upon them.
Friday’s jobs report was so good that Evercore ISI simply called it “perfect.” It was at the least very impressive and hit on all the things that we are looking for from these reports without any evidence that might give us pause or worry.
This was the report that people were worried about not looking so great, based upon things like the perceived economic slowdown, the manufacturer numbers, and the GM strike. Instead, we saw some nice gains in both the number of people employed and their average wage, both in healthy areas and getting even stronger.
Both of these metrics were affected by the GM strike, as this not only took jobs off the table, it removed some higher-paid ones, but the data still remained very positive. Higher wages are bringing more people into the workforce and this is an important factor in expanding the economy further by allowing for further gains in productivity.
The payroll numbers rose by 128,000, easily beating the expectation of 85,000 which was toned down by the 42,000 jobs lost to the strike and 20,000 government census workers who were let go in October. Pleasant surprises like this in the face of these challenges does bode very well for continuing our positive momentum on this key front.
While wage increases are inflationary, and this is not something that we should be rooting for that much at other times, when inflation is too low and the Fed is working hard to bring it up, this is exactly what we want to be seeing right now. While we normally just look at prices with inflation, higher wages provide the economic capacity to raise prices further, and although this increase was pretty modest, it is pointing us in the direction that we want to be heading in now.
The Way the Jobs Market is Expanding Seen as a Game Changer
Evercore ISI sees the greater workforce participation seen in this latest report as a “game changer,” based upon the ability of this positive trend to elevate the economy without causing too much inflationary pressure. This does take us to a very nice place and if this continues, and the indications are that it will, it will serve to not only raise GDP growth, but more importantly, raise it net of inflation, which is the sort that matters and represents real and not just nominal growth.
This is among the things that the expansionary policy of the Fed is directed at improving, to take us from a period of mild economic deceleration to moving more toward the ideal. The ultimate goal of expansionist monetary policy, such as the recent cuts in the Fed funds rate, is to raise economic productivity, and one of the best ways to measure this is to see total wages go up like they are.
Expanding the money supply does serve to have us borrowing against the future and enjoy the benefits now, not unlike how we borrow to buy things now in our personal lives, and this in itself doesn’t provide fundamental economic progress, but gains in productivity overall as evidenced by these still improving employment numbers move us forward in an even more meaningful way, much like getting a raise does to improve our overall economic situation.
This also takes us further away from concerns about a recession that a lot of people have now, and among the data that pertains to recession risk, the health of the employment market plays a central role. When this goes down, core productivity declines with it, and on the other hand, while this is healthy, recession risk will remain low.
When people speak of economic recessions generally, they often are actually referring to employment recessions, and the reason why the one in 2008 was seen as so noteworthy wasn’t so much that GDP growth took a little holiday, it was because so many people lost their jobs at this time.
Even depressions get categorized this way, even the Great Depression, which was seen by just about everyone to last throughout the decade of the 1930’s, even though the actual depression only occurred during the early part of the decade and the economy expanded most years.
The job market didn’t expand in turn though, and remained beat down, so we could see double digit GDP growth and double-digit unemployment occur together. The job market took such a massive hit at the beginning of this though that it took a long period of growth to bring it back up to levels that weren’t terrible.
After the 2008 recession, it was once again when people started returning to work that we declared a recovery, even though GDP came around faster, as it usually does. Higher unemployment is a more deeply rooted problem, and it can take some real time to expand things enough where we’re fully back on our feet again.
Employment data can be seen to be the base of the economic pyramid, where the effects of economic forces play out at its most fundamental level, and this therefore represents a very important barometer for the economy, at least as far as the strength of an economy goes. We don’t want this too strong, but we’re nowhere near the point where this even becomes a thought, and there is plenty of room to comfortably grow further.
Fed Chairman Powell made it clear in his remarks this week about how important the job market is and how healthy it is, and if not for this, we may indeed be facing some real risk of a recession. The effect of economic contraction upon the job market may involve a lag, where it takes time for things to deteriorate enough for real job losses to start mounting, but unless this starts to go, we remain in good shape.
When it continues to strengthen, this is even more encouraging, and this is what we are seeing. We could even stand to take a modest hit here and still be fine, as today’s numbers are on the far end of good, and we’ve done very well economically with lower ones.
What Happens in 2021 Is the Real Risk
We will need fiscal policy to remain friendly for this show to go on beyond the 2020 election, and this is what we really need to be worried about, not a bigger slowdown or even a recession occurring on its own. Any Democrat winning the presidency is going to be painful for the economy, and especially the threat of a socialist president such as Elizabeth Warren taking over the White House.
Warren raised the ante this week on her quest to do great harm to the economy by not only ramping up the rates of her proposed wealth tax, but to also propose a new way of calculating tax owed on stock positions, taxing them at mark-to-market prices while still being held.
Under her latest scheme, Microsoft’s Bill Gates would be forced to pay $12 billion in tax in the first year of it, with a lot more to come. Unfortunately, this is where her calculation ends, by dreaming about all those trillions collected by this over the years with no real examination of what the ultimate costs to the stock market and the economy would be, and that’s the scariest part of all this.
Taxing stock positions prior to their being sold would simply be devastating to the stock market, and together with all the stock that would need to be sold to pay wealth taxes, along with the way that this would contract the economy overall, this would simply overwhelm the market in a way that may even exceed anything we have seen before.
The hope that the Trump can win a second term isn’t completely out of the question, but in looking at how badly he is behind all of the leading Democratic candidates right now in the polling, this looks like a long shot right now. Trump’s bombastic personality certainly attracted the support of enough right-wingers last time around, but at this point in time, the widespread disapproval among voters that has built up during his presidency seems almost insurmountable.
For now, things look pretty rosy on the employment front at least, and this is the area that we will need to pay close attention to as well if we end up getting spanked by tax hikes and other policies that are friendly to neither the stock market nor the economy.
Raising taxes is the opposite of the economic stimulus that we are seeing and rooting for these days though, and while the Fed does have some nice tools to work with, they can easily be overwhelmed by the constriction that higher taxes causes, especially ones that are designed to pay for things like Medicare for All which would require more taxation than the country has collected over all the years from 1776 to today.
The amount actually collected from the schemes that we’re seeing suggested will be far less than expected anyway, but what this can easily exceed at doing is throwing out the baby with the bath water so to speak as we seek better health care insurance and tear down the economy to try to get it.
We don’t want to be too worried about such a thing though, whose price tag now exceeds $52 trillion now over 10 years, up from $20 trillion that long ago, and we haven’t collected $52 trillion in taxes combined during the country’s entire history, but where Medicare for All is concerned, no obstacle seems too great. Fortunately, it is not enough for one man or woman to want this, even if they are president, because this would require a level of support in Congress that remains pretty unrealistic. This is not to say that there will be no harm from such a president, but it will not be the maximum amount, thankfully, as that would be truly disastrous.
We still have a year of Trump left though, and as frustrating a president as he can be, his war on China might end up being small potatoes compared to what we may be up against with the next person. The skies are very clear for now though and we should enjoy these prosperous times and ensure that we are getting our money to work for us on the long side while we still can.