Don’t let job numbers derail your investment portfolio

Fluctuations in unemployment data do not necessarily pose a threat to economic growth and the bull market

A customer walks by a hiring sign in front of a Target store in Sausalito, California. AFP

Tick … tick … tick. With the US unemployment rate inching up from last year’s five-decade low, is the clock ticking on this bull market? Many fear so, claiming only big US Federal Reserve cuts can stave off recession as hiring slows.

Astoundingly wrong! Unemployment and job growth are long-late-lagging indicators, utterly useless as recession or stock market predictors. That is particularly true today, given lingering Covid-era distortions. Here is why you shouldn’t sweat recent jobs numbers.

Rising unemployment spurring recession surely seems intuitive – particularly since job loss creates pain. That pain must spread economy-wide as logic goes – given consumer spending averages about two-thirds of US economic activity. Surely unemployed workers must slash spending, right?

Not necessarily. History proves consumer spending is stunningly stable – through slowdowns or even recessions. During the 2007-2009 recession, personal consumption expenditures declined just -4.1 per cent from peak to trough. Similarly, during the 2001 recession, PCE generally rose, with the main exception being September's -1.6 per cent month-over-month dip amid the 9/11 terrorist attacks.

All this makes sense. Yes, people may cut back on luxuries during hard times. But the vast majority of spending is essential, not discretionary. Unemployed people still buy groceries, mostly pay their rent or mortgage and utilities, buy petrol and pay to fix that flat tyre or broken lock. All that keeps feeding into broader economic activity.

To truly understand how the labour market and economy intertwine, think like a chief executive. As a downturn starts weighing on sales, they cut costs. They may slash inventory, shelve expansion or slow investment. Maybe they shrink bonuses or hold marketing campaigns.

But cutting headcount? That comes later as a last resort. Few chief executives want to cut jobs. There is the human angle – they don’t want to disrupt company culture and workers’ lives. And the business angle: Experienced help is hard and costly to replace when times improve.

Hence, all the “jobless recovery” fretting common in early economic rebounds perpetually misses the point. Job growth lagging rising sales is perfectly natural!

Examples? While the 2007-2009 recession ended in June 2009, the US unemployment rate peaked at 10 per cent in October 2009 – four months after the recession ended. Total nonfarm payrolls didn’t bottom until February 2010. (Unemployment rates often ebb before job growth resumes, because discouraged workers drop out of the workforce and aren’t officially counted as “unemployed”.)

By the time the unemployment rate peaked, America’s S&P 500 had already risen by 55.3 per cent. When job growth resumed, it was up 66.8 per cent. The unemployment rate stayed above 9 per cent through September 2011, yet stocks kept climbing.

Similarly, following the recession from March 2001 to November 2001, the unemployment rate peaked in June 2003. Payrolls didn’t bottom until August. By then, the new bull market was well under way and the recession long since over.

Even during the rapid, lockdown-induced recession of 2020, unemployment peaked in April while stocks bottomed the month before. Hiring returned in May.

Unemployment data tells you where the economy was, not where it is headed. You don’t need me to tell you the past few years have taken us to some bizarre places. Yes, I mean Covid.

You are probably tired of hearing it, but lockdowns wreaked havoc on economic cycles – and the metrics used to gauge them – including employment.

Through August, US labour data show more than half of 2024’s unemployment rate increase stems from new entrants or re-entrants to the workforce – not layoffs. Many are seemingly those who left the labour force amid Covid-era chaos.

So while job growth continues, payrolls rose 0.1 per cent month-over-month and 1.5 per cent year-over-year in August. It just isn’t rising as much as the official workforce. That has boosted the unemployment rate to 4.2 per cent this August from 3.4 per cent last April – a 54-year low. This same factor underpins rising unemployment across much of Europe, Canada and beyond.

Yes, hiring has slowed since 2021 and 2022’s rapid rise. But that is largely normalcy’s return after reopening businesses rushed to rehire. Besides, hiring data and unemployment rate wiggles are normal in any expansion and bull market.

Take 2009-2020. After payrolls bottomed in 2010, annual growth bounced between 1.3 per cent in 2019 and 2.2 per cent in 2014. Today’s 1.5 per cent is right in that range. Normal. Nothing to fear!

But plenty do fear it – and fear of a false factor is always bullish. Don’t let their fretting fool you – labour data don’t threaten this expansion and bull market.

Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $285 billion of assets under management