In his 2006 book, The Only Three Questions That Count, Ken Fisher (founder and Executive Chairman of Fisher Investments) offered three basic questions to help you think differently about markets than the investment crowd—and, potentially, more correctly. Ken Fisher’s first of the titular three questions in the book—“What do you believe that is actually false?”—seems especially apt now. With recession fears already swirling tied to a downtick in manufacturing, many point to slowing hiring and fewer job openings as a sign the broader economy is at risk. But a look at history should show you this practice is fruitless. Employment data lag markets and the economy by quite a distance. Using them as a forecasting tool is a bad idea, in our view.
Perhaps it seems rational to assess jobs data for clues about the economy’s direction. After all, consumer spending accounted for 68% of 2018 US GDP. [i] Without jobs, those consumers would likely have less income, weighing on consumption and, hence, growth. Those buying this notion might see the news that private employers’ hiring slowed to an average of 143,000 in 2019’s first nine months—the lowest average through nine months since 2010—as troubling. [ii] The US Bureau of Labor Statistics’ Job Openings, Layoffs and Turnover (JOLT) report echoed that slowdown. While JOLT still showed 7.05 million open positions in the US, that is down -7.5% from November 2018’s peak of 7.63 million. [iii]
But this demand-side theory has a problem: Historical data don’t support it. Employment data typically follow growth rather than lead it. So it was in this long economic expansion’s early days. Private payrolls, depicted in Exhibit 1, hit their low in February 2010—nearly a year after stocks’ March 2009 bear market low—and about eight months after the US economy returned to growth.
Exhibit 1: Stocks Lead the Economy—Jobs Follow It
Source: Federal Reserve Bank of St. Louis, FactSet and National Bureau of Economic Research (NBER), as of 10/9/2019. Total US private payroll employment and S&P 500 Total Return Index level, January 2007 – September 2019. Recession shading is based on NBER dating.
The same holds true throughout most historical economic cycles. In Ken Fisher’s 2011 book, Debunkery, he noted that, “During and after every recession you hear folks say, ‘Stocks can’t rise until unemployment improves!’” But in this bull market, stocks rose 41.2% before private payrolls started rising again. [iv] The mid-2000s bull market launched in early October 2002. Payrolls didn’t bottom until July 2003, by which time the S&P 500 was up 23.3%. [v] The huge 1990s bull market began in October 1990. By payrolls’ February 1992 low, US stocks were up 41.9%. [vi] In the early 1980s, employment hit a low after the double-dip recession in December 1982. By that time, stocks had jumped 34.2%. [vii]
The same holds true for bear markets. The early 1980s’ bear market started 10 months before employment hit its peak in August 1981. The Tech bubble burst—starting 2000 – 2002’s bear market—in March 2000. Employers kept adding to payrolls through December 2000. January 2008’s payroll peak came closer to—but still months after—markets hit their pre-bear market top.
This all makes intuitive sense, too. Instead of looking at the economy from consumers’ point of view, consider it from employers’ or suppliers’ perspective. To them, labor is a necessity, but a costly one. One that can take a lot of time to develop, too. Recessions force businesses to get lean and mean—or die. They will typically aim first to trim the fat by curtailing expansion plans or growth initiatives that aren’t core to the business’s survival. But as a recession drags down demand, they may have to cut deeper. Employers probably don’t want to, but cutting jobs may be necessary. Similarly, when the economy turns, it is likely employers will be slow to dial up payrolls—costs—until they really must. Hence, layoffs and hiring data lag.
Moreover, the recent data don’t show declining employment. They show rising payrolls with millions more jobs open—little different than a year or two ago at this time. Exploring historical data Ken Fisher-style shows basing a bearish outlook on late-lagging jobs data that don’t show a noteworthy downshift seems likely to prove an investment process error, in our view.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.
[i] Source: US Bureau of Economic Analysis, as of 10/9/2019. Personal Consumption Expenditures share of GDP in 2018.
[ii] Source: Federal Reserve Bank of St. Louis, as of 10/9/2019. Average monthly change in private payroll employment through September in calendar years 2010 – 2019.
[iv] Source: Federal Reserve Bank of St. Louis and Global Financial Data, Inc., as of 10/9/2019. US private payroll trough during/after recessions and S&P 500 total return (calculated monthly closest to bear market low). March 2009 – February 2010.
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