Market Commentary

• Some would argue that the domestic economy needs to create somewhere in the neighborhood of 50,000 to 100,000 jobs each month just to absorb new entrants into the labor market.
• But right now, it appears that companies are not hiring but they are also not firing.

After last Friday’s employment report covering August was released, many market pundits described the U.S. labor market as “moving at stall speed” as the number of nonfarm payroll jobs created dwindled to just 22,000, well below the 75,000 expected by the consensus estimate. And some experts would argue that the domestic economy needs to create somewhere in the neighborhood of 50,000 to 100,000 jobs each month just to absorb new entrants, like recent college graduates, into the labor market.

With the negative revisions to the prior month’s job gains taken into account, the domestic labor market is, at the very least, slowing noticeably. Chairman of the Federal Reserve Jay Powell has told market participants on numerous occasions that monetary policy decisions over the balance of this year will be using employment data as a key factor in gauging when, or even if, interest-rate cuts would be made.

But monthly job-creation numbers are not the only statistic to track. In most past cycles, initial jobless claims, reported every Thursday morning, have provided a good leading indicator for the likely path of domestic employment. Initial jobless claims track the number of people filing for first-time unemployment benefits in the prior week. Initial claims have been largely stuck in the 220,000 to 240,000 range for most of this year. History shows that in decades past, even in very good economic times, initial jobless claims would frequently come in at levels above 300,000. In this cycle, the current relatively steady level of claims means businesses are holding on to their employees. The bottom line, right now, appears to be that companies are not hiring but they are also not firing.

Recency bias and economic uncertainty are two big factors at play. Remember that during the later stages of the COVID pandemic, particularly as businesses were reopening and trying to bring staffing levels up to meet increased demand, workers were hard to find. When available, many businesses hired aggressively, which came at a high price in many cases. Recency bias is placing a large amount of decision-making emphasis on what happened in the recent past rather than looking over a longer-term period. As a result, many companies do not want to get caught short workers and have held on to staff. And of course, uncertainty over tariff effects and economic growth has made many companies hesitant to expand their current workforce.

Our strategy has been to trim risk and rebalance portfolios as the S&P 500 Index has rallied more than 30% off the April lows at the time of this writing. Specifically, we are moving funds from the Communication Services and Energy sectors (both now neutral rated) toward the Financials sector (rated most favorable). We are also moving funds from U.S. Small Cap Equities (rated unfavorable) and Commodities (neutral rated) toward U.S. Intermediate Term Taxable Fixed Income (favorable). We remain overweight (favorable) U.S. Large Cap Equities and U.S. Mid Cap Equities.

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