Labor market strong. Markets drop 20 % in a week.

With the labor market looking up, we decided to “hire” a new employee, Luna. She will be working out of our Colorado office and focusing on property inspections (and anything that has to do with snow). Please welcome her to the team 🙂

The Labor Department reported 3/6 that the U.S. economy added 273,000 new jobs during the month, while the unemployment rate was 3.5%, matching its lowest level in more than 50 years. Based on this metric the economy is doing amazing, yet the stock market and bond market are telling drastically different stories. How accurate is the labor market at predicting the next hiccup in the economy?

What was in the data?

Economists surveyed by Dow Jones had been looking for payroll growth of 175,000 and a 3.5% jobless level. Average hourly earnings grew by 3% over the past year, in line with estimates, while the average work week, considered a key measure of productivity, nudged up to 34.4 hours.

There was more good news for the labor market: The previous two months’ estimates were revised higher by a total of 85,000. December moved up from 147,000 to 184,000, while January went from 225,000 to 273,000. Those revisions brought the three-month average up to a robust 243,000 while the average monthly gain in 2019 was 178,000.

The stock market and bond market are painting a different picture

Even with the robust job numbers, the stock market and bond market are portraying that an economic downturn is closer than we think. Bond prices which rise during times of economic uncertainty have hit record lows with talks that they might approach zero later this year. Stocks at the same time gave up 20 % in one week which has only occurred 14 times since 1928. With a decline this swift the market is getting on the recession bandwagon.

Will the jobs report or Bond market prevail?

Unfortunately, the jobs report is backwards looking. The recent number were for February before the Coronavirus hit the United States shores so the data from this reading is a bit misleading. March numbers, published in April, will provide a much better guide based on the recent turmoil. I would suspect there will be a large loss in payrolls due to cuts in the hospitality industry as businesses and travelers pull back on conventions along with work and pleasure travels.

On the flip side the stock market appears to be running high on “emotion” with investors bailing before things possibly get worse. I suspect that the market is overreacting a bit as nobody has a firm grasp on the real implications of the Coronavirus and the worldwide economic impacts.

Are there better metrics?

Yes, there are better metrics than the stock market and labor market. Two highly regarded indicators are:

Inversion of the yield curve: This has already occurred multiple times in the last year which shows that a recession is in the future, but unfortunately the yield curve only predicts there will be a recession in the next 24 months, historical data is all over the map on exactly when during the next 24 months. If we get another large inversion soon, this will be a stark indicator that a down market is in the offing.
Consumer confidence: We haven’t gotten a new report since the Coronavirus occurred so we will have to wait until 3/31 to see how consumers have reacted to the news. I suspect the March report will show a considerable drop in confidence. The million dollar question is how far will it drop and will the consumer rebound from the large drop?

Long and short, we have yet to see a virus fueled recession in the last 100 years so we have little to go by to accurately predict when a recession will hit. There currently is considerable “noise” in the economy, but the yield curve and more importantly consumer confidence need to be on the top of your list for gauging the true impact.

Summary

It is not time to panic and/or stock up on toilet paper! Currently there is considerable uncertainty in the market due to the virus spreading throughout the United States. We are staring into the unknown which is causing markets to react with passion. I suspect over the next 30 days, the markets will take a bit of a breather as the medical community gets a grip on the virus and the true impacts. Now is the time to be patient until we get a better handle on the true depth of the economic impact.

Additional reading/ Resources

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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