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 turn our sights to the one thing, other than the pandemic, that may matter the most: jobs.
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 14 million jobs created since last April, and it has recouped 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 300,000 new jobs created per month for the past six months. Should that trend continue, the level of “maximum employment” will be reached in about two years. Job growth of nearly 600,000 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.
Have a great weekend.