Why Investors Are Celebrating the Poor Jobs Report
Weak payrolls cut the odds of a Fed hike, and that attracted buyers.
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The story of the day on Friday was a celebration of bad news. The July jobs report was weak by most metrics, yet stocks moved nicely higher.
Payrolls did not just come in below expectations, they declined by 23,000 against a consensus of around 80,000. June was revised down from 57,000 to 20,000, and May was cut from 129,000 to 63,000. Those revisions took 103,000 jobs off the books and dropped the 12-month average to just 34,000. That sounds like a pretty lousy economy, but that was not the issue on Friday.
Investors celebrated because a labor market this soft removes the inflationary pressure that comes from hot growth, and that cuts the odds of a Fed rate hike. The chances of a quarter-point move at the September meeting fell from 67% a week ago to 44% after the report. The odds of no hike at all this year doubled to 25% from 12%.
Unemployment Rate Falls for Wrong Reason
The one number that looked good was the unemployment rate, which slipped to 4.1% from 4.2%, but that was not the good news it appeared to be. The rate fell because the labor force shrank by 264,000 people, not because anyone found work.
Household employment actually declined by 87,000. Labor force participation dropped to 61.4%, the lowest in more than five years and, outside of the COVID period, the lowest since 1976. The employment-to-population ratio slipped to 58.9%, its weakest since May 2014. There are a lot of folks dropping out of the labor market and since they are no longer counted the unemployment rate drops.
Fewer people working and fewer people looking is not healthy economically but it is how you get a lower unemployment rate.
The payroll decline overstates the weakness. It came almost entirely from a loss of 53,000 government workers, mostly in local government education, which economists think is a seasonal quirk that may get revised away. Private payrolls actually rose 30,000.
What holds up under examination is the wage figure. Average hourly earnings grew 3.2% over the past year and the pace of wage growth slowed. That is the key number that matters for inflation, and it is the honest reason the rate picture improved on Friday. The market celebrated the fact that people are seeing less growth in their paychecks.
Real Action Was Underneath Again
Once again, there was a huge number of smaller stocks moving up more than 10%. I have over 200 stocks up more than 10% versus 140 on Thursday. That is frothy action in the small names. Breadth finished at 60% positive and the small caps led with a gain of 1.1%.
That has been the pattern all week. Whatever the indices are doing, the earnings reports from secondary names keep producing large moves, and the money keeps finding them. Small caps benefit doubly from a softer rate outlook because they carry more floating rate debt and are more sensitive to financing costs than the large caps are.
Game Plan
Small-cap earnings wrap up next week and then we move into peak vacation season on Wall Street. The reports have been the main theme working in this market for two weeks, and that engine shuts off shortly. What follows is thin volume, few catalysts and the weakest stretch of the seasonal calendar.
My approach is to keep working the reports while they are still coming and to be selective about what I carry into the quiet period. A stock that has already reported and held its gains is a very different proposition from one that ran up on sympathy and has nothing behind it.
Have a great weekend. I’ll see you on Monday.
At the time of publication, DePorre had no positions in any securities mentioned.
