To my clients:
It was a mixed week for North American stock markets with the Canadian TSX finishing up 0.9%; the U.S. Dow Jones Index down 0.2%; and the U.S. S&P 500 up 0.6%.
After a two week break, my return to work coincides with the Big 3 economic releases in the U.S. At 59.9 and 61.7, both the ISM Manufacturing and Non-Manufacturing (i.e. Services) Indices continue their respective streaks of exceptional readings. Specifically, readings near or above 60 are indicative of very robust economic activity. The possibility of recession is nowhere to be found in readings such as these.
At 235,000 new jobs created for the month of August (as reported this morning), employment seemingly remains strong also. Historically, monthly employment gains at or above 200,000 are associated with strong economic expansion. However, there is a major caveat with respect to the employment data. Expectations were for a reading of 750,000 so, in this context, a reading of a “mere” 235,000 new jobs is a striking disappointment.
Delving further into the employment miss, one must keep in mind the staggering magnitude of job losses in early 2020 when the economy effectively shut down owing to covid. Recall that in May 2020 alone, over 20 million jobs were lost! In order to claw out of a massively deep hole such as this, well above normal job gains are required over a sustained period so as to get the workforce back in normal balance. Thus, while 235k new jobs would typically be considered a very good monthly employment report, that’s not so much the case now. It also explains why economists were expecting/hoping for more than triple the number of new jobs reported today.
Given the magnitude of the miss on such an important economic report, one might have reasonably expected the stock markets to have had a bad day. But that is not what happened. Generally speaking, markets were “flattish” today and broadly up for the week. Why? In my opinion, there are three main reasons markets have been sanguine in the face of such a miss:
1) The U.S. Federal Reserve has clearly identified normalized employment conditions as a key hurdle to clear before “tightening” monetary policy (i.e. raising rates). All else equal, today’s report likely delays the onset of higher rates and, possibly, the upcoming “taper” of quantitative easing (while important, a topic I won’t delve into this week). Low rates for longer tends to be supportive of stock markets;
2) Much of the disappointment in today’s employment report was concentrated in the leisure and hospitality industries. With intensifying transmission of the Delta variant, its unsurprising that these vulnerable “people” sectors would bear the brunt of the impact. But it bears noting that these are also lower wage industries and the economic multiplier effect of lost income to this segment is less than if the shortfall in anticipated new jobs was seen in a higher income segment such as software engineers (for example); and
3) I reiterate that the ISM Manufacturing and Non-Manufacturing Indices are, in combination, at possibly (without taking the time to fact check this claim) the highest collective levels I’ve seen in my career.
Let’s finish this week’s update with a quick few words on the Delta variant. Unquestionably, Delta has delayed the full “return to normal” that many of us may have been anticipating. But, as I have previously written, I do not think Delta will derail the economic expansion. Vaccines work quite well against Delta (admittedly, not perfectly); populations have little to no appetite to return to full lock-downs; even if locked-down, society has learned how to effectively conduct business while sequestered; and, generalizing, those choosing not to vaccinate also tend to be more libertarian in outlook, and are unlikely to curtail economic participation as aggressively as the broad population. Economically speaking, the real covid risk remains the emergence of a vaccine-immune variant. Prolonged propagation of Delta and other existing variants make such a possibility more likely. Hopefully though, such “likeliness” remains low. Nonetheless, I remain vigilant for such a development. Absent such, portfolios remain overweight equities.
That’s it for this week. All the best,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
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