This is the third post in a 3 part series where I've been discussing the "themes" I believe will drive the market in 2023. I've included links to the first two below, but to summarize Post 1 dealt with how the energy sector should continue outperforming in 2023, Post 2 discussed how the dollar seems set to continue falling from the highs this year and how that benefits emerging market stocks, and this post is going to discuss how 2023 will be more about unemployment than inflation.
Earlier this month the Federal Reserve released its economic forecast, predicting that the rate of unemployment would increase to 4.6% by the end of next year, up from 3.7% today. The unemployment rate has never risen that much outside of a recession and those numbers mean about 2 million Americans would have to lose their jobs (or enter the workforce-- which is exceedingly unlikely). With an additional million or two people out of work, the newly unemployed and their families would sharply cut back on spending, while for most people who are still working, wage growth would flatline. When companies assume their labor costs are unlikely to rise, the theory goes, they will stop hiking prices. That, in turn, slows inflation.
The most recent JOLTS report showed over 10 million open jobs which amounts to roughly 1.7 jobs for every person looking for work. This has tilted the scales in the favor of workers for the first time in a very long time. It means that employers have been forced to increase wages in order to attract new talent and retain the talent they already have. The number of quits has now exceeded the pre-pandemic high for 19 consecutive months, as more than 4 million Americans voluntarily left their jobs in 17 of the past 19 months. Meanwhile employers, especially in low-wage sectors, are still struggling to fill open positions. The most commonly stated reason for people quitting their jobs for another position was higher pay.
During the post FOMC press conference in October, Jerome Powell declared that “the labor market is just very, very, very strong, very strong.”
And to top it off, he added: “The broader picture is of an overheated labor market where demand substantially exceeds supply.”
Simply put, labor supply and demand need to come back into balance to contain wage growth and services inflation, which continues to climb. That means the Fed must push down even harder on the demand side for workers, to bring it back in line with supply, limit job growth, and reduce upward pressure on wages. The risk is an even higher federal-funds rate than the 5% currently anticipated, which suggests there will have to be broader layoffs and a heightened chance of a deeper recession.
This shift in focus from inflation to the labor market can be visualized in how the market reacted on December 13th when CPI inflation came in at 7.1% versus a 7.3% consensus projection compared to the reaction the next day, and every day since then when Powell spoke about the labor market in his December 14th FOMC press conference. In fact the rally today was sparked by new unemployment claims coming in above expectations. As backwards as it may sound, the market is desperately seeking indications that the jobs market is softening. That means more people out of work.
This isn't exactly an investable trend in that there's really no stock or ETF that tracks moves in the jobs market. The purpose of this post is to alert you to pay attention on days when jobs data is released as those will likely be significant drivers of market price movement next year. There is a weekly report on new unemployment claims that comes out every Thursday. The market wants to see that number going up, and by more than what's projected. There is also the non farm payroll report released by the Bureau of Labor and Statistics on the first Friday of every month (next release is Jan 6) which measures the change in the number of people employed from the previous month in non farming jobs. A lower than expected number would be seen as bullish in this backwards environment. Another important report is the JOLTS report. The job openings and labor turnover survey (JOLTS) is a monthly report by the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor counting job vacancies and separations, including the number of workers voluntarily quitting employment. The market will be looking for a lower number of open jobs.
That's the environment we're currently in. Job growth is viewed by the market as a bad thing because it means wage growth and wage growth means the Fed will need to take harsher actions for longer to reduce inflation. If not for the fact that high inflation means the Fed will hike rates the market wouldn't care about inflation. It's actually good for the bottom line of companies. Corporate profits in the nonfinancial sector hit a record high of $2.08 trillion in the third quarter even as 40-year-high inflation continues to squeeze American consumers. Specifically, an analysis from the Economic Policy Institute, confirmed by the Roosevelt Institute, shows that 54% of the increase in prices we’re seeing is due to increased corporate profits. So to say the market cares about inflation is wrong. The market cares about what the Fed will do because of high inflation which we've seen over the course of this year means higher interest rates. As long as Powell continues to point to the jobs market as being one of the primary drivers for this inflation and this inflation is the primary driver for rate hikes, the market will want to see higher unemployment, fewer job openings, and an end to wage growth.
So while the first two posts pointed you towards sectors of the market to watch, this post is pointing you towards economic data you should be watching and why. I hope these 3 posts help better prepare you for 2023 and results in a positive year for you. I encourage you to join my Discord community where we discuss trends and themes day in and day out. I know members of the community would tell you that participating has helped them make better decisions and make more money. If you found these posts helpful please share them! Have a safe and happy New Year!
https://discord.gg/GaUxA4dvZs
Link to post 1
https://public.com/p/87m0CZvtxcJWB2AC4mjafqxM2S7UQ345
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Link to post 2
https://public.com/p/BQSU7yCPEG9Un7BhAZw39Rxnnco5KaFn
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https://www.pewresearch.org/social-trends/2022/07/28/majority-of-u-s-workers-changing-jobs-are-seeing-real-wage-gains/
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https://www.investopedia.com/articles/04/092204.asp
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https://oversight.house.gov/news/press-releases/subcommittee-analysis-reveals-excessive-corporate-price-hikes-have-hurt
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https://cleantechnica.com/2022/11/07/top-inflation-cause-54-corporations-robbing-you/
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