Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
The jobs report came pretty close to meeting expectations, but it was the lack of wage growth that may have dampened investor enthusiasm. Indeed, the March employment report revealed that the US economy added 192,000 jobs, just shy of the 200,000 jobs economists were forecasting. The unemployment rate remained flat at 6.7%, as the participation rate increased to offset the rise in employment.
Essentially, there were no real surprises in the report. Rather, it confirmed the unwinding of prior weather effects. Specifically, it showed a rebound in retail sales jobs, which grew by 21,000 following two months of declines, and an increase in the average work week to 34.5 hours, returning to November levels and suggesting that the winter weakness was largely weather-related.
The jobs data confirm the Federal Reserve’s gradual labor-market recovery scenario, which means that we’re unlikely to see any changes to current monetary policy. However, the stock market—especially growth stocks—sold off on the news.
Why would the market react negatively on Friday? High expectations, for one. In the days ahead of the report, the whisper number on non-farm payrolls rose as high as 250,000 jobs. Such a lofty target may have fueled disappointment when the data came in under the 200,000 jobs estimate.
However, there were also other forces at work. There was no wage growth in the March report. Average hourly earnings didn’t increase—they actually fell slightly to $24.30 from $24.31. This was disappointing given the solid private-sector wage growth we saw in the prior two months, which some economists had hoped was the start of a trend.
Justifiably, Fed Chair Janet Yellen is concerned about the anemic wage growth over the past few years, given the impact employment has on the health of the economy. And because she views it as a sign of significant slack in the job market. Even if there’s job growth, a lack of personal income growth means many consumers are still having trouble making ends meet. In turn, that constrains the amount of money they can spend.
To connect the dots, with consumers representing roughly 68% of US GDP, we need strong consumer spending to propel the economy forward. Hopefully, the disappointment in wage growth in March is an aberration in a medium-term uptrend. But we should also recognize that with formerly disenchanted workers returning to the labor force, which is a positive development, employee earnings growth may temporarily slow.
Still, while there’s generally substantial slack, there is little, if any, slack in specialized areas of the economy. This is unlikely to alter overall wage inflation but is likely to widen the income gap we’re seeing in the US economy.
Staying Looser for Longer
Whether or not the jobs report had anything to do with Friday’s stock-market drop, the question is, will this losing streak continue? We think it’s unlikely to last long because there are more reasons for investors to embrace risk rather than run from it. Economic data have been relatively positive recently, suggesting much of the downturn in January and February was due to bad weather.
Plus, the jobs report is unlikely to alter the Fed’s highly accommodative monetary policy, which makes stocks more attractive on a relative basis. While first-quarter earnings estimates continue to be revised downward, that guidance may already be priced into the stock market.
However, given that US stocks may be a little frothy, investors with a short time horizon might benefit from shifting to an overweighting in lower valuation stocks, especially large caps that pay dividends. And given the potential for higher volatility in the near term, investors should boost exposure to dividend-paying stocks because of their history of being less volatile than the overall stock market.
Looking ahead, we await Wednesday’s release of the FOMC minutes. We expect the report to snap the recent downside momentum in stocks because Fed officials will likely reiterate their “extraordinary commitment” to supporting the economy.
The Upshot is available as a subscription for financial professionals only. New issues will be delivered via email every Monday. Your email address must be in our records for your subscription to take effect.