June 2018
Weekly Commentary June 15, 2018
Is the Jobs Market at a Tipping Point?
By Tim Courtney, Chief Investment Officer
The jobs reports released the past couple of months showed some astonishing numbers. For the first time since the statistics have been reported, job openings outnumber unemployed Americans1. With 6.7 million of the former and only 6.3 million of the latter2, there’s suddenly a gap between the jobs companies need to fill and those potentially available to fill them. “Too many jobs” sounds like a good development, but many investors may be wondering if it’s too good.
The U.S. economy remains one of the most reliable and strongest in the developed world3. It’s strong enough that equity prices have moved much higher in recent years4, and any imperfect news can lead to tremors of volatility. This positive jobs news will continue to perpetuate positive expectations, allowing the U.S. markets to trade at up to a 40 percent premium to other markets5.
But economics lives up to its “dismal science” description as any silver cloud has a dark lining. With this good news comes some fear of much higher inflation and interest rates, which could start to eat away at gains in wages, net investor returns and purchasing power. The Federal Reserve is watching this closely and has communicated their plan to continue to raise rates to keep inflation at bay6. But it is unclear if this labor shortage will lead to near-term inflation due to wages moving higher quickly.
There’s a possibility that current job hunters are holding out for a dream scenario – the perfect opportunity with high wages – and they won’t settle for anything less. This could lead to increased competition from employers who would offer higher pay and eventually be forced to raise prices. If this is the case, interest rates and inflation are likely to rise. Since equity markets like inflation rates where they’ve been sitting for the past few years (at about 1 to 2 percent7), anything higher may cause the market to pause.
The other reason for the gap could be a skills mismatch. It’s possible the U.S. is simply not producing enough workers with the right skill sets to fill the jobs that are actually open. Companies in fields such as engineering, mechanics, and science have been complaining for years that they are struggling to find qualified candidates8. If this is what’s causing the gaps between jobs and job seekers, it’s more likely that outsourcing workers will be what fills the holes, and this may allow inflation to remain at a lower level.
Whatever the cause of the gap, the jobs report remains a positive sign of U.S. economic stability. It’s a sign of a strong U.S. economy and is a reason why U.S. assets are trading at premiums. Earnings have also looked good this year9, paving the way for further success in the U.S. economy and leaving a slight cushion for wage increases.
We won’t know how the wage inflation and interest rate game will play out until it is determined which of these two factors is contributing to the difference between job seekers and unfilled jobs. In the meantime, we will continue to keep an eye on interest rates and inflation, as well as their potential effects on the market.
Sources:
1 cnbc.com/2018/06/05/there-are-more-jobs-than-people-out-of-work.html
2 news.morningstar.com/all/dow-jones/us-markets/201806055934/american-jobs-outnumber-the-jobless.aspx
3 investopedia.com/articles/investing/022415/worlds-top-10-economies.asp
4 finance.yahoo.com/quote/%5EGSPC/
5 DFA Equity Characteristics, Price-to-Book and Price-to-Earnings Valuations as of 05/31/2018
6 money.cnn.com/2018/06/13/news/economy/federal-reserve-june-rate-hike/index.html
7 usinflationcalculator,com/inflation/current-inflation-rates/
8 money.cnn.com/2018/01/17/news/economy/us-worker-shortage/index.html
9 nasdaq.com/article/q1-earnings-season-good-but-not-great-cm955197
PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971.
