Jobs Jobs Jobs!

Over the last few months, when friends and family have asked me the all too common question on where I think the stock market is headed, I’ve had a pretty consistent answer – Jobs Jobs Jobs! Yes there are many other factors that come into play, including geopolitical uncertainties, economic growth from emerging markets, and housing prices. But to me, there’s one driving variable left in the market right now, and that’s the employment picture in the US.

Why I Think This

My reasoning behind this rationale is deceptively simple and can be summed up to a few bullet points:

• It’s the one area of the economy that hasn’t shown significant signs of recovery since the market bottomed in March 2009. The US unemployment rate has been stuck in the 9-10% range for a while now, while other indicators like productivity, household income, and manufacturing have improved at least modestly (yes, I know housing hasn’t improved significantly either, but I think the jobs is more the “cause” and the housing prices will be the “effect” in this scenario.
• This recession is markedly different than others because it’s the first time in many years that the US consumer has really cut back on spending. In past recessions, particularly the dot-com downturn in the early 2000’s, the consumer has been able to continue spending and, since this group makes up 2/3rds of economic activity, the recessions are able to be overcome fairly easily. With the unemployment rate being as stubbornly high as it is, the US consumer has severely cut back. Initially it was essentially all consumers that were cutting back. People were afraid of losing their jobs and cut back on non-essential spending. Although many of those consumers that didn’t lose their jobs have come back, there’s still a large contingent out there holding back on spending because they’re either unemployed, or have permanently adapted to a leaner lifestyle.
• Now that I’ve made the connection between employment and spending, let’s take it one step further to make the connection between employment and corporate spending. US corporations have a record amount of cash on hand. As the recession began, they also cut their own expenditure drastically. Corporations have refrained from spending most of this cash with the exception of increasing dividends to shareholders and buying back stock. However, real economic recovery requires that this capital be deployed and deployed effectively. To do this, companies need to see the biggest part of the economy come back to life – the consumer. And for that to happen, those consumers need to start working more. As you can see in the figure below, it’s a bit of a catch-22 – companies won’t hire until consumers start spending, and consumers won’t spend until companies hire them which requires those companies to spend that cash they’ve been hoarding. At the end of the day, once those people start getting hired, that’s when the real money will get back into the system and we can start seeing real GDP growth.
  

And Now the Bad News

Now that I’ve beaten the employment horse to death, here’s the problem. Last Friday, the government released it’s monthly employment figures which showed that companies hire surprisingly few people (83,000 vs. the expected 112,000). Keep in mind that this is the private sector employment number and that, overall, 125,000 employees LOST their jobs – mostly due to census workers being laid off as expected. Furthermore, the overall unemployment rate fell to 9.5% from 9.7%, but that’s likely due to the fact that fewer people are actively searching for jobs and, therefore, are no longer counted as unemployed.

But the real worrisome part here is that employment continues to be the nagging buzz-kill for the economic recovery. We still aren’t seeing the critical mass of hiring that is needed to spur some of the consumer spending increases and the subsequent capital deployment by private companies. The engine is sputtering and just not turning over.

Where to Invest Here

As you’ve probably noticed, the market has been down significantly the last few weeks. This is in large part due to pre-cursor signs of the economic troubles. Interestingly enough, when the actual employment numbers came out last Friday, the market was quiet and didn’t react either way. I think this was mostly due to the fact that investors already had an idea that this was coming as well as the upcoming long weekend. Therefore, I think this week will be a key indicator for the market on investor sentiment to the employment picture. It will either be perceived as a sign of more bad things to come and, hence, a longer term negative for the market (which I think is more likely) OR a buying opportunity since much of the downside may have already been priced in. It’s hard to say either way, but I’m watching the market like a hawk this week for clues on this enigma.

Long-term, though, I really think that an improving jobs picture is going to signal the next leg up in the stock market and the opposite picture will signal the next leg down. Like I said, many of the other economic indicators have been positive (although the factory orders number also came in with poor results which is cause for concern), so there is hope for a recovery here. We just need to get this employment engine revved up!

What are your thoughts?

Questions/Comments/Feedback?
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The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.