Today’s most important news will be the monthly nonfarm payrolls report. With nearly half of America getting at least one vaccine shot and many others fully vaccinated, reopening efforts are ramping up. Although we are not going to repeat last June’s 4.8 million jobs added, April should show solid strength, resulting in the neighborhood of 1 million newly employed. Estimates run as high as 2 million. This follows March where 916,000 jobs were added. In normal times, ~100k jobs per month are needed to keep up with job seekers. We’re still far away from normal, but the trend is very constructive in getting back to full employment by year end, possibly sooner.
Obviously, most of these added jobs are coming from the hardest hit Covid areas like retail, health care, personal services and travel related industries. Of the 8.5 million people out of work from the pandemic, most need reopening efforts to go smoothly. However, the labor force participation rate (the number of Americans who are working or actively looking for employment) is at its lowest level since 1976. Many people are not coming back to the workforce ever again. In fact, more boomers retired last year than ever before, tallying over three million. The talent pool is drying up. It will be easier to get back to full employment if less people are being counted.
Equally important for investors and job holders, will be wage metrics. More companies are giving out pay increases, increased benefits and signing bonuses to get workers back. Here we have a tougher economic balance. Biden’s team extended the Federal CARES Act, giving those unemployed extra payments until September 4th. Many will opt to keep taking “free money” instead of working 40 hours a week for similar benefits. Businesses have to get creative in order to bring more people back to our workforce. This could be a problem for several more months or longer as savings accounts are flush. Job seekers can be more patient coming out of this recession and wait for the career path they want. Last night, South Carolina announced it is joining Montana in ending some of the federally-funded unemployment benefits in order to address ongoing workforce shortages. Montana’s unemployment rate is already down to 3.8%. Combined with State benefits, some unemployed were making $14/hour.
From an economic perspective, wage growth is crucial, not just for consumer spending but also inflation. A consistent 2% – 3% increase in wages is great for the economy and its workers. Anything lower or higher causes issues. Most recessions are preceded by wage growth of 4% or more. As noted, this could be a short-term issue until unemployment benefits run out and the labor force expands. Workers today are still flush with cash and happy to take a few more months off while getting paid. Employers are forced to get creative with digital enhancements (you can get your Happy Meal without ever talking to a live person), robotic investments (modern manufacturing plants have a fraction of humans and can run 24/7) or outsourcing (helpdesk calls now automated to artificial intelligence software). Many manual positions are becoming scarce and unwanted.
Are we accidentally destroying the hard working middle class that made America great by pumping cash into those who could be working? Only time will tell, but it is clear this economy does not need as much money printing today as it did last year. Certain pockets of those unable to find jobs that fit their skill set deserve assistance, but a large swath of people are getting handouts that don’t need them. Further, we’re throwing a massive amount of spending into an economy already growing faster than at any time over the past few decades.
Q2 GDP estimates are approaching 13%. Vehicle sales are back near peak levels. Consumer spending is well above trend. Truckers are working overtime and still can’t get shipments delivered quickly enough to online shoppers. Net worth is at an all-time high, home values as well. Productivity broke 4% last quarter, the most since 2010. Globally, Governments still have over $10T in excess capital ready to be deployed, with more coming if the Democrats can stick together on Biden’s next two spending bills. On a personal level, walk around the mall during the day. Around here, it looks like Christmas season with crowded shoppers carrying full bags. There needs to be an endpoint on our stimulus front, or inflation will stick around longer than the Fed predicts.
Take a look at these commodity price changes over the past year:
Lumber +347% Copper +94% Sugar +63%
Crude Oil +148% Soybeans +84% Platinum +57%
Gasoline +139% Silver +76% Wheat +43%
Corn +124% Palladium +70% Natural Gas +38%
Heating Oil +123% Cotton +63% Coffee +35%
Many of these basic commodities are at multi-year highs. Companies are reporting price hikes to offset rising input costs. This will hit consumer pocketbooks at an increasing rate as we get into the second half of the year. An average home today already costs $12,000 – $20,000 more to build than last year just from increased lumber costs. My frequent food trips are more expensive every time. Supplies will eventually recover, but it would happen a lot faster if people were willing/able to go back to work.
This inflation, along with Janet Yellen’s comments that rates may need to rise soon, is hitting overvalued technology growth stocks hard this week. The Nasdaq was down four straight days before recovering slightly yesterday. While the yield curve is being suppressed by Federal Reserve open market purchases, the market is anticipating a future when the punch bowl is pulled away, starting with a slowdown in bond purchases. Obviously, this should lead to higher interest rates.
Federal Reserve Presidents can keep touting the mantra of holding rates lower for longer, but if employment continues to ramp up, prices keep rising and wages expand, they will be left with no choice. High flying, high P/E, and no earnings companies are taking it on the chin. Peloton, Quantumscape, Palantir, Zoom, Snowflake and DoorDash are all down more than 50% from their recent highs. If inflation really gets out of hand, this could expand into other areas as well. For instance, most of the FANGMAN group are only fractionally off their all-time highs. It pays to actually turn a profit. In the long run, Amazon# or Microsoft# don’t care if the 10-year Treasury is at 1.5% or 2.5%. Their business lines will do fine. In the short run, anything can happen.
If history is any guide, this does not mean an end to this bull market. Far from it. Typically, a Federal Reserve reversal towards raising Fed Funds results in an immediate sell off of 5% – 10%. Then the market rebounds back towards new highs. Who knows if this time is different but what we do know is excessive stimulus is not needed at this point. We are on firm footing, flush with savings and getting back to work.
As earnings explode higher, valuations are becoming more normal. Focusing on world class operators with clean balance sheets and current earnings should continue to work over the long-term. Any hiccup today is a chance to reposition portfolios into tomorrow’s winners. A good rule of thumb, if your stock is making new lows during this correction relative to the March decline, is that something may be amiss. Look for new bargains.
Today, actor Breckin Meyer turns 47. Hey, that’s Jim Meyer’s nephew!
James Vogt, 610-260-2214