Markets continued to consolidate over the past week, grappling somewhat with elevated investor expectations. The first quarter earnings season, which is nearly complete, has been strong, but it has been met with a relatively muted response by most stocks, even by many of those that reported better than expected results. It suggests that good earnings may not quite be enough in the current climate. There are other factors at play, including supply chain bottleneck, inflation concerns, and the ongoing pandemic. This week, we provide a brief update on the latter situation, and turn our sights to the one thing, other than the pandemic, that may matter the most: jobs.
Canada’s progress over the past week was a bit disappointing. The country’s 7-day average rate of new daily infections stands at 7800, which represents an incremental drop from the week ago period. Only Ontario, Saskatchewan, and British Columbia experienced declines. Quebec had a modest increase in its average new infection rate. Meanwhile, Manitoba, Nova Scotia and Alberta all saw meaningful increases. The northern territories also saw a notable uptick. While Canada’s third wave of the virus appears to have peaked a few weeks ago, a more meaningful decline in new infections will only be driven by a broader drop across more provinces or a larger fall in some of the bigger provinces. Canadians undoubtedly hope to see both in the weeks to come.
Elsewhere, trends have largely remain unchanged. The U.S. continues to see steady declines. Europe is also experiencing declines though to varying degrees. India is garnering the most attention given the sheer volume of new daily cases with the country having recently reported more than 400,000 in a single day.
It’s (almost) all about jobs
In today’s day and age, everybody appreciates data. The same is true for investors, who consistently parse through financial statements, economic releases, and high frequency information such as credit card spending, traffic congestion, and restaurant bookings (when open), among other things to gage the health of consumers, businesses, and economies. And while they all have merit, the one thing that may trump them all is the direction of the job market.
The employment situation in North America has come a long way over the past year. Between February and April 2020, Canada and the U.S. saw meaningful losses, roughly 3 million and 22 million, respectively. From May 2020 onwards, both countries have seen significant gains. Canada has been less consistent from one month to the next given the re-emergence of lockdowns across various provinces. Nevertheless, its gains have amounted to well over 2 million, suggesting it has recouped more than three quarters of the job losses. Meanwhile, the U.S. has seen approximately 15 million jobs created since last April, and it has recouped well over two thirds of the jobs that were lost.
The positive employment trends should continue going forward, driven by the full reopening of economies later this year. But it’s the pace of job creation that may be more important as it may foreshadow the timing of a larger shift in monetary policy, such as interest rate hikes, from the Bank of Canada and the U.S. Federal Reserve. The latter has indicated repeatedly that it is focused on getting the economy back to “maximum employment”, which is comparable to the level of employment prior to the onset of the pandemic. The U.S. has been averaging over 400,000 new jobs created per month for the past six months. Should that trend continue, the level of “maximum employment” will be reached by the end of 2022. Job growth of nearly 800,000 new jobs per month would translate into a level of full employment by next summer.
In a perverse way, investors may be hoping for good, but not great, job growth. That would give central bankers enough of an excuse to keep policy unchanged for longer and support existing financial conditions, and consequently valuations in the bond and equity markets. A stronger trajectory may suggest that monetary conditions will have to be tightened sooner, forcing investors to more closely scrutinize valuations. At the end of the day, we welcome a backdrop marked by employment growth as opposed to the one we witnessed last spring. But, we are mindful of the unique challenges presented by a much stronger job market, and are prepared to adjust portfolios if need be.
Should you have any questions or concerns, please feel free to reach out.