Jobs Report paradox
Once upon a time, the government reporting employment statistics used to be a ho hum affair. Economists found it hard to drum up interest, and it barely caught the attention of the business press. Those days are long gone. For the last couple of years employment levels have been top of mind for politicians and economists. This makes sense. The US is a consumer based economy. We buy a lot of stuff and we can’t do that very well without a job to pay for things. Recessions are basically about job losses which generally means everyone buys less. So making sure there are lots of jobs are key to a healthy, humming economy.
While that simple relationship is easy to understand, there is a complication. Ever since the financial crisis, we have been in an odd place. The Federal Reserve has been stepping in to try and support our economy. They do this by increasing the money supply and setting interest rates low (lower rates means companies and people are more likely to borrow to fund new businesses and new buying). The stock market loves an ample money supply (liquidity) and low interest rates (which are great for businesses and valuing companies). In the recent past, when the Fed has suggesting it would limit the money supply and/or raise interest rates the market has taken it badly. The resultant drop has been nicknamed a taper tantrum.
So that puts the jobs report in a funny place. If the news is good, lots of jobs created and higher wages for jobs in general, is should be good news for the stock market. it means the economy is strong and people have money in their pocket to spend. But if the jobs report is too good, the Fed may be forced to react. It could trigger the Fed into pulling back some of their accommodations earlier than anticipated. Limiting the money supply and eventually raising interest rates. The market will not like that, so too good a jobs number may trigger a market sell off. Sigh. Paradox.
Tomorrow we get the August jobs report. Could be good, could be bad, could be too good or too bad. No one knows, so the market is holding its breath and we’ll see. Best case for traders is an overreaction to anything we get, then a reversal back to the mean. Best way to approach a report, frankly, is to ignore it. Have a longer term outlook and don’t sweat any one month’s numbers. Look to the long term and simple ask yourself, is the economy strong? Is it getting stronger or weaker? Longer term trends are the ones you should be paying attention to if you are investing. Traders, however, will probably be busy tomorrow. I suspect I will be.
Market today: Another day of gains and records as the unemployment claims dropped, suggesting Friday’s job numbers should be good. Delta is still an unknown factor, it may stay the Fed’s accommodation plans if the virus appears to be slowing economic activity. The jobs numbers will be out at 8:30am. I opened a fair number of contacts over the course of the day, hoping for a strong reaction one way or another at the open that then reverts to the mean. I bet on Docusign (DOCU) and Broadcom (AVGO) into earnings this afternoon. Both had good reports but are slightly negative, good report on jobs could help them turn positive. The rest of what I opened ranges across sectors but a little tech heavy. Let’s see how things go.