Full Speed Ahead

By Dr. Charles Lieberman, Co-Founder & Chief Investment Officer

The latest jobs data is consistent with the soft landing thesis, but such a conclusion is still far from definitive, so more data is needed and the Fed will likely remain on pause for several months, quite possibly for all of 2024.  But with solid growth continuing and no signs of the long-expected recession, the environment should be very positive for stocks and somewhat benign for bonds.

The Case For a Soft Landing:

The Bureau of Labor Statistics estimated that striking workers going back to work added 28,000 to the November count of 199,000.  Moving them back into October creates a sequence from September through November of 262,000, 186,000, and 171,000, suggesting a deceleration in hiring. 

Concerns About The Soft Landing Thesis:

As is clear from the graph above, hiring has slowed.  But much of that slowing was inevitable.  Monthly gains of 500,000 or 400,000 were impossible to sustain.  Such large job growth reflected the rebound from the pandemic shutdown in response to an accommodative policy by the Fed and massive fiscal stimulus from Washington.  That rebound is now largely behind us.  What is more concerning is that hiring is still fairly robust relative to the influx of new job seekers.

Labor force participation rose fairly sharply over the past twelve months by 0.6 percentage points, from 62.2% to 62.8%, adding 3.733 million people to the workforce, or an average of 311,000 per month.  Despite that upswell in job seekers, the unemployment rate increased from 3.6% all the way to 3.7%.  So, the overwhelming majority found jobs, a truly impressive feat.  Yet, it is also not sustainable.  The peak in labor force participation prior to the pandemic was 63.3%, and baby boomers are still retiring at a rapid rate, roughly 10,000 per day.  That’s why demographers ballpark underlying growth in the labor force between 50,000 to 100,00 per month.  It seems likely that the demand for labor is strong enough to absorb the influx of job seekers if it remains elevated.  But if the supply of labor moderates, as seems very likely in the near-term, labor markets should get somewhat tighter, adding to wage pressures.

Wage inflation has moderated from the overly hot pace of the early recovery from the pandemic, as measured by the somewhat inaccurate year-over-year average hourly earnings figure, reported as 4.0% in November.  That was taken as good news by those hoping for inflation to get to the Fed’s 2% target fairly soon.  But the more accurate year-over-year employment cost index, total compensation for all civilians, slowed only to 6.8% as of Q3.  That remains quite high.  So, the labor market remains quite tight and any further tightening, as would occur if entry into the labor slows, would be problematical.

Economic and Investment Implications:

Prospects for a recession still remain beyond our radar screen, despite widespread expectations built into the bond market that one is coming fairly soon, likely in 2024 or even in the first half of 2024.  We do not believe the market’s expectations (or hopes or fears) will be realized soon.  There is surely a recession coming, but it remains beyond the visible horizon at this time.  In the meantime, growth should remain solid and above the economy’s long-term sustainable average of 1.5% to 1.75%.  The unemployment rate should resume its very gradual decline, depending very much on how many job seekers enter the labor force.  If that influx continues a bit longer, so will strong growth and the decline in unemployment may take slightly longer to appear.

Monetary policy is likely to remain on hold while the Fed waits to see how the data plays out.  It will take time, months at a minimum, but quite likely at least a few quarters.  By then, the upcoming election will be imminent.  The Fed will not want to change policy in an election year, especially if the data suggests that rate hikes are appropriate, unless the case is compelling.  So, it seems there’s a very good chance that monetary policy remains unchanged for all of 2024, unless some new factor surprises everyone.

The economic environment pictured is extremely positive for stocks and decent for bonds.  The economic growth we envision will propel corporate profits in 2024 and valuations, except for the Magnificent Seven, are quite low.  So, stocks should perform well.  The bond market is a bit over its skis in expecting multiple Fed policy rate declines.  Correcting this misjudgment should not offset bond coupons, so fixed-income investors should earn a modest positive return.  But as often happens when the bond market is wrong, it simply pushes out further into the future its expectations, so it is likely to remain well out over its skis.  That will also limit any downdraft in bond prices.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.