Headline Grabbing Unemployment Trend

by Professor Jeremy J. Siegel, Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania

It was a big week for the markets and economic releases. A month ago, when the January jobs report data came in, I thought it was one the strangest reports I ever saw, with a large increase in new jobs but a plummet in hours worked. That was more symbolic of what you see in recessions, and I didn’t really know what to make of it. Friday’s jobs report revised away most of the anomalies.

This month’s jobs data report was a good—although unemployment ticked up from 3.7% to 3.9%. I saw a headline—3.9% unemployment is at a 2-year high. Although there was a previous 3.9% unemployment rate, which was revised down to 3.8%, Friday’s rate made it the headline-grabbing high for this cycle. But from a long-term standpoint, we still have very low unemployment and have a robust economy.

If we cross above a 4.0% unemployment threshold in coming months, that would put more pressure on Powell to start lowering rates. Also, the broader U-6 measure of unemployment also hit a 2-year high and is up almost a full percentage point over last fall. This rise in unemployment, despite job gains, reflects people coming back into the labor force but not finding jobs right away.

Wage growth came in largely as expected. Remember, we had noted that 4% wage growth is not inflationary when it is accompanied by strong productivity and that is the case. A 4% wage growth with 3% productivity is only 1% of inflationary pressure—not a problem for the Fed at all and this is reflected by the low growth of unit labor costs that accompany the productivity data.

Tuesday's report on the Consumer Price Index (CPI) is going to be very important. I think there were quirks in the data that pushed the January report up, particularly on owners’ equivalent rent that might reverse, and we may see a quite good inflation report. In fact, there was a “mini scandal” as the Bureau of Labor Statistics (BLS) released some data to a select group of inquirers about the rebasing of the BLS data, a move that was unprecedented. The timing of the CPI report is important because it comes right as the Fed members are filling in their economic projections for the Federal Open Market Committee (FOMC) meeting next week.

I thought Powell’s testimony last week was a little more dovish than I expected. Instead of emphasizing January inflation data as troublesome, he suggested the Fed was close to a decision to lower rates. If we get a good CPI and PPI, I think a May cut is very possible. However, I believe the headlines from the Dot Plot release will likely be more hawkish than what we saw last December due to the strength of the economy. This might be initially disturbing to the market but will be brushed off if the economy remains strong.

Jobless claims last week hit right at the center point of the range I want to see—right in between 200k – 240k claims. I think this reflects a healthy level of employment growth.

Gold, like bitcoin, is breaking to new highs after showing weakness for nearly four years. There are number of “momentum” assets now: Gold, Bitcoin, and Nvidia, which stumbled last week when NVDA had a 10% intraday loss on Friday. These reversals are common in trending markets—there is an old saying on Wall Street, “Up the staircase, down the elevator.” Last week’s reversal does not usually end the momentum cycle, and new highs are likely. The big question for Nvidia, and tech more broadly, is: are we in a 1996-97-like hype cycle where these stocks are still going to get even crazier as we did 24 years ago during the internet mania? There’s no way to answer that question now. There could be 2-3x more upside in Nvidia if it follows Cisco’s valuation path to its peak. To be clear—this is not my prediction of what will happen—just to note as to what is possible in a mega bubble.

Now we emphatically do not have 1999-2000 levels of speculation in the markets or tech. We are paying 21 times forward earnings for the broad market—with the growth sectors at 30 times and value sectors at 16 times earnings. In 2000, the tech sector was selling over 60 times earnings with much earlier stage companies. We have more real businesses today with more reasonable multiples.

I like to see a broadening participation in the rally to small caps and value—and that rotation is what we saw on Friday afternoon. Small caps should benefit from a soft-landing economic scenario. A headwind for this group has been small banks—with a needed cash infusion into New York Community Bank. While we could see more problems at individual banks, I don't think these issues will metastasize into a systemic problem for the economy or the markets.

On the political front, Biden did not stumble at his State of the Union address and came out feisty, performing far better than many Democrats had feared. However, there will be many plot turns for both Biden and Trump over the next eight months. While there is dissatisfaction on both sides, I reiterate, the political choices could be much worse. Biden again emphasized in his speech he is pro-capitalism. Last election cycle, there was Bernie Sanders, who would be a candidate that would have been much worse for business. While Trump likes lower taxes, a high tariff on China and further trade conflicts with allies would not be good for the economy. To summarize, Biden had a good performance last week but there’s a long way to go until the election.

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