Global Perspectives

A weekly analysis of timely economic strategy issues from Wells Fargo Investment Institute.

June 18, 2019

Peter Donisanu, Investment Strategy Analyst

Markets Hail Weaker Jobs Data

Key Takeaways

  • This month’s release of the May jobs report missed market expectations of 175,000 new hires.
  • The latest data release reinforces a weakening trend in the labor market, which we believe is reflective of a broader slowdown in the U.S. economy.

What It May Mean for Investors

  • We expect market volatility to remain elevated this year as investors balance rate cut expectations, geopolitical uncertainties, and likely weaker economic releases.

Download the report (PDF)

The recent monthly jobs report release showed that the U.S. added just 75,000 net new jobs in May, missing market expectations of 175,000 new hires. The establishment survey also showed that wage gains cooled last month—as wages rose by 3.1% from a year earlier—compared to 3.2% in April. What’s more, the household survey showed that the labor force participation rate for the key 25-54 age demographic fell to an 8-month low as unemployment held steady at 3.6%. Looking ahead, we see an increased risk of more disappointing jobs data as we expect U.S. economic growth to soften.

Chart 1. Nonfarm payrolls disappoint in May—add to weakening net new hiring trendNonfarm payrolls disappoint in May—add to weakening net new hiring trendSources: Wells Fargo Investment Institute, Bloomberg; June 13, 2019.

More job weakness may lie ahead

Looking at longer-term hiring trends, we note that an average of 164,000 new monthly jobs were created during the first 5 months of 2019—compared with 229,000 over the same period last year. What could be contributing to this slowdown?

When compared to changes from a year ago, hiring in the manufacturing, construction, and retail trade industries has cooled. Manufacturing purchasing managers’ indices (PMIs) have continued to fall, and factory orders have disappointed this year. Ongoing weakness across the real estate market has been evidenced in reports on new housing starts and permits missing expectations—as well as slowing home sales and prices. Retail sales growth is half of what it was last summer. We anticipate that these trends will continue as trade and other policy uncertainties abound. We expect these weaker economic trends to translate into softer hiring activity throughout the course of this year.

Could bad news be good news?

While the May jobs report was disappointing, market participants took it in stride earlier this month as equity prices rose on the news. We believe that a key reason for the U.S. stock rally was rising market expectations for at least one rate cut by the Federal Reserve (Fed) this year. Our current expectation is for a single Fed rate cut before year-end.

There is some hope that the Fed can stabilize a slowing U.S. economy through its monetary policy changes. Whether it can do so likely will depend on how actors in the real economy respond to potential policy changes.

For now, a host of policy and geopolitical headwinds have clouded business leaders’ ability to plan for the future—as uncertainties abound. This is a key reason why we expect slower U.S. economic and earnings growth this year. In such an economic environment, we anticipate higher market volatility. This is one reason why we favor trimming excess risk exposure and aligning portfolios toward long-term investment goals, even as optimism surrounding a potential Fed rate cut provides a temporary boost to risk sentiment.

Economic CalendarEconomic CalendarSource: Bloomberg, as of June 14, 2019.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets.

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Wells Fargo Advisors is registered with the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority, but is not licensed or registered with any financial services regulatory authority outside of the U.S. Non-U.S. residents who maintain U.S.-based financial services account(s) with Wells Fargo Advisors may not be afforded certain protections conferred by legislation and regulations in their country of residence in respect of any investments, investment transactions or communications made with Wells Fargo Advisors.

Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.