Morning Market Thoughts
Good morning. I am typically dark on Fridays and do not post notes. But I thought I’d just send out a quick comment in light of economic numbers that have been published this morning. The May employment numbers are pretty ugly, with some sobering revisions from April. Labor force participation is down to 62.8%, which is brutal. But hey, the unemployment rate is down to 4.7%, which is awesome, right?The only problem here is mathematics. The unemployment rate is the U-3 rate. The labor participation rate is U-6. I’ve been commenting on the U-6 number for quite a while because it is the only one that matters. The U-3 rate is the “headline” number, and the number that Janet Yellen has a habit of quoting in her comments about our “strengthening” economy. But in the most truthful terms, the U-3 number is useless.
As many know, the unemployment rate calculation ASSUMES that anyone who ceases to receive unemployment benefits has magically and secretly found a job. In other words, the government cannot fathom the idea that someone can run out of unemployment benefits,…and still not have a job. Instead, the assumption is that they are working.
So, according to this convenient calculation, the U-3 unemployment rate is getting really really bullish. It is so amazing that we are at nearly full employment (um….because all those folks who were collecting unemployment benefits happened to find work at the exact moment that their unemployment benefits ran out. Truly amazing!). Meanwhile, around 100 million people who would like to be working are either unemployed or underemployed.
My bet is that the U-6 number will largely be ignored, and the U -3 number will be touted by Baghdad Bob as evidence that the economy is growing. Josh Earnest is taking the hit on CNBC and talking about how great things have been over the last 6 month and talking about moving averages. Basically, this is a strong recovery. As I hear Josh Earnest talk, I suddenly get enthusiastic.
Secretly, the FOMC will be having conversations about how they’re going to get out of the corner they’ve painted themselves into in announcing through various speeches and statements that the market was not pricing in a June rate hike accurately…basically, telling us that they were going to hike in June. Now, if they hike rates, they’ll be doing the exact wrong thing…but hey, they’ll be doing what they told the market they’ll be doing. If they don’t hike rates, they’ll lose the last vestiges of credibility they have with even the most friendly apologists for the FOMC.
We are seeing this reflected in the market this morning, but not as much as you might think. The S&P is down just 0.52% though it is continuing to decline. Midcaps are down 0.59%, and small caps are down 0.71%. So the broader market is holding up…though they are continuing to fall as I write this.
The biggest hit is being taken by the financial sector. Th e DJ US Bank Index is down 2.5%. Banks make money when money stops being free because they have something of value to lend. The Fed, of course, has made money basically worthless, as there is no return on saving it. (Do you have a savings account that actually has a yield?) The only recourse for most folks is to put it into the market, which is actually a good thing for us.
Going forward into the next two weeks, there will be increasing attention focused on the Fed as the market wonders whether Janet is going to raise rates despite the absence of any data whatsoever that it is appropriate to hike rates. At this point, I make no predictions; only observations. But this month’s statement from the Fed will be one of the most “interesting” ones yet.
Watch how utilities (XLU), Consumer Staples (XLP), and Gold (NUGT) do. Those are the sectors that will do the best today because that’s where market investors perceive safety to be. Growth sectors and stocks will likely struggle all day.
I’ll have more to say about this over the weekend.
Dan
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