Jobs Data, Shipping, & Oil
In honor of rising inflation, lately I've been listening to some of my favorite tv show themes from the '70s & '80s on Spotify. One tv theme that is great to listen to almost anytime is the theme for "Taxi." My absolute favorite character on that show was Jim Ignatowski, masterfully played by Christopher Lloyd.
Of course, my favorite scene from that show is when Jim, who is a vagrant, tries to get a license so he can drive for the taxi company. The classic scene shows Jim asking for help on the 1st question, "What does a yellow light mean?" One of the other characters on the show, Bobby Wheeler (played by Jeff Conway), whispers, "Slow Down." Jim and Bobby go back and forth as Jim attempts to read the question slower and slower, misunderstanding Bobby's attempt to give him the answer to the question. If you want a good laugh for today, the clip is attached here.
I often feel like the character Jim Ignatowski when it comes to financial markets these days. There are a lot of things that don't make sense and the reaction of investors at times is mind-boggling. Here's what we're seeing so far this week...
Everyone Trying To Get Ahead Of The Jobs Data. This week, it seemed like everyone from Wall Street, to the Fed, to the White House was trying to get ahead of what many expected to be a disappointing jobs number today. On Monday, White House Press Secretary, Jen Psaki, pointed to an expected bad jobs number and floated the idea that Omicron was to blame. Below is her quote:
"Because Omicron was so highly transmissible, nearly 9 million people called out
sick in early January when the jobs data was being collected," Psaki told reporters.
"The week the survey was taken was at the height of the Omicron spike...As a
result, the jobs report may show job losses, in large part because workers were out
sick from Omicron at a point when it was peaking."
Two Fed presidents, Bostic (Atlanta) and Harker (Philadelphia) reiterated the talking point and investment banks on Wall Street joined in the chorus. A few things bother me about this line of narrative.
First, the data for each month's jobs report is supposed to be safeguarded from early release because the number can have an effect on market prices. The Department of Labor went through an audit process in 2012 to supposedly prevent early releases from happening. How is it that the White House Press Secretary got a hold of the data (9 million people being a rather specific number)?
Second, I'm not convinced that Omicron could be pinpointed as the root cause for a supposed bad jobs number. According to the Bureau of Labor Statistics (a division of the Department of Labor) website, "Individuals also are counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not, because they were: on vacation, ill, experiencing child care problems, on maternity or paternity leave, or taking care of some other family or personal obligation..." If that is the case, how could people calling in sick affect the jobs number. In addition, we've been dealing with COVID now for almost 2 years and jobs were growing during that period. Omicron, according to the statistics, is not nearly as severe nor deadly as the Alpha of Delta variants of the virus.
Third, a single bad month of jobs data is not a reason to panic. Sometimes that data is adjusted, which is why we also get a report on the preceding month's data that is usually revised higher or lower due to corrections and/or seasonality. Why the need get out in front of the data? Could there be other reasons for a potential decline in jobs?
Speaking of adjustments, it appears that all of the consternation over a bad January jobs report was for naught. Though the ADP private payrolls data released on Wednesday showed a loss of 301,000 jobs for January, the government's report this morning showed a considerable surprise to the upside.
Of the 78 economists polled, none were expecting the report to show 467,000 jobs added (median expectation was +150k). In addition, both December and November's jobs were each revised higher by more than 300,000. Though the ADP report showed job losses in the Leisure & Hospitality and Transportation sectors, the government's report showed gains in those key sectors. And there was more good news on the jobs front this week as Initial Jobless Claims declined for the 2nd consecutive week by 23,000 beating analysts' estimates. Continued Claims were higher than expected, but still dropped from last week by 44,000 and it was the first decline in 3 weeks. The irony is, after all of the gnashing of teeth this week over a bad jobs number, the unexpected positive report is pushing markets lower as the data allows room for the Fed to hike interest rates.
Shipping Crisis Seems To Be Largely Ignored. The lack of attention the shipping crisis is getting could be one of the major issues that determines how the rest of this year shakes out.
While shipping delays have improved just slightly over the last few weeks, shipping delays still remain extremely elevated at 90 days out. This is having a profound effect on inflation. If consumers cannot get the goods they desire, some may be willing to pay higher prices in order to get delivery. This adds to inflation. In addition, the number of ships anchored or loitering at ports across the country remains elevated. At the LA/Long Beach ports alone, the number of ships stalled there remains above 100. If you look at the data on items that are contributing to inflation the most, which are also heavily constrained by supply delays (New Cars, Used Cars, & Furniture), simply solving the delivery delays in those products alone could reduce inflation by up to 2%.
While helpful, solving shipping would not alleviate the other major contributor to inflation - the price of oil. Oil supplies are also down, causing the price of oil to rise above $92/barrel. As long as supplies remain low, there's little relief at the pump for consumers. OPEC recently voted to keep output increases at "moderate" levels. This does not provide much hope for a decline in gas prices. In fact, Goldman Sachs even admitted as much, sticking to their prediction that oil could hit $100/barrel by the 3rd quarter of this year - which the commodity is already on track to reach within the next few weeks.
This probably means that inflation is here to stay. That's not to say that inflation will remain elevated. Again, if some of the supply constraints are solved, we could see prices in certain goods abate. However, a recent study shows that when inflation exceeds 4%, it typically remains at 4% or higher for a few years.
According to Andy Martin at Advisor Perspectives, from 1914 through 2021, there were 8 times inflation reached at least 4%. In 6 of those 8 periods, inflation stayed above 4% for 3.9 years, on average. So there is a 75% probability that inflation is here to stay with us for at least another year or two if history is any judge. I'm positive that the analysts at the Fed have seen the same charts and this is why the Fed has become so hawkish of late. If the shipping crisis is not addressed and supply chains remain at abnormal levels, the Fed's back will be up against the proverbial wall. Some believe that is already the case, hence the equity sell off in January.
Equities Set To Moderate. It is likely that last month's sell off is not the only pullback we will see this year. Last week we laid out the case that we get 8% intra-year corrections 76% of the time and that the market had likely put in a bottom last week. However, headwinds remain and mid-terms are coming up later this year.
History shows that when January is a negative month for equities, the rest of the year is not exactly rosy. According to Schaeffers Investment Research, when the month of January is negative for the S&P 500 Index, the returns for February through December are typically moderate. On average, the total return for the index is +2.65% the rest of the year when January is negative. The median return is a little better at +4.5%. The path to the end of the year looks like it could be choppy. The important thing to remember is that selling out of equities altogether is probably not a good idea. First, the best hedge against inflation is equities. With rising interest rates and rising inflation, bonds offer a negative total return. Cash is obviously offering a negative real return with money market yields at sub-1%. Even if equities end the year at the median return shown in the table above, the return is still much more attractive than cash or bonds. Second, the level of our Wealth Protection Signal is no where near the 1st cash raise trigger. During the sell off in January, the highest level the Signal reached was 22, which means it would have had to more than double from that mark to reach the 1st cash raise trigger. If you followed the Signal and did not sell in January, you were rewarded as the S&P 500 Index has climbed 6% off the lows. Lastly, the National Financial Conditions Index, tracked by the Chicago Fed, is still at very "loose" levels, indicating that the economy and markets are still at financially stable levels. Until the data changes substantially, investors should stay the course and perhaps re-evaluate their risk tolerance and goals.