What Does a Bad Labor Market Look Like and What Does It Mean for Markets?
Concern about the state of the labor market rose sharply last week as virtually all the labor market data, including Friday’s jobs report, pointed to a cooling of job growth. But while concerns are rising, it’s very important to realize that even with last week’s underwhelming data, the labor market remains broadly stable.
Jobless claims sub-250k, monthly job adds still positive, and JOLTS (The job openings and labor turnover survey) still around 7 million, imply a mostly healthy labor market. The concern is the trend, as most metrics are showing that while companies aren’t actively laying off workers, they are slowing hiring and that can be the first step to laying off workers.
If the labor market rolls over, it would be substantially negative for the economy and markets, and given stretched valuations and general investor complacency, I want to 1) Identify levels that would signal trouble in the labor market and 2) Examine how a slowing labor market would impact markets.
Labor Market Levels That Imply Trouble: Jobless Claims: First level: 260k. A break of that level would imply a more than 20% jump from the lows around 210k-220k and imply real deterioration in the labor market. Warning level: 300k. A break above 300k on the four-week moving average would signal a labor market that’s likely contracting.
Unemployment Rate: Key level: > 4.5%. A move above 4.5% (so, 4.6% or higher) is consistent with labor market deterioration, and at that point a move towards 5.0% is likely (which is consistent with economic slowdowns).
JOLTS: < 6.5 million. During economic slowdowns, JOLTS drop towards 5.0 million. JOLTS haven't been below 6.5 million in years and a decline below that level implies that companies are slashing hiring and “hunkering down” on expenses (which will put a headwind on the economy).
How Would a Bad Labor Market Impact Markets? Likely a 15% - 30% decline. Normally, a decline in the jobs market is a lagging economic indicator, as employers only slash jobs after the economy has already slowed. But I believe it’s more coincidental this time around (meaning, happening at the same time as the economy slows). Here’s why... Full employment has been the silver bullet to higher interest rates and tariff uncertainty. People are dealing with higher prices, and consumers are still spending because they have jobs. If layoffs occur en masse and those labor market indicators are hit, then consumer spending will sharply contract, making any economic slowdown much worse.
For the S&P 500, a sub-20 multiple would be absolutely expected, meaning the S&P 500 could fall between 500- 700 points (10%-15%) to start (and depending on how deep a slowdown is, further). If a full-on economic contraction occurs, an ultimate 30% decline in the index isn’t unreasonable. Bottom line, the labor market is not bad; however, it is losing momentum and this is something we need to watch carefully. If the labor market goes, then likely so too will the economy (and that’s a bearish game-changer for stocks).
As it stands now, I do not predict this occurring. I am just watching all indicators to see ahead of time what could happen. Chances are that the end of the year will again be a huge upturn in stocks.
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