Moneybeat: Job growth* in June

MARY REICHARD, HOST: Next up on The World and Everything in It: the Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Good morning Nick, good to be with you.

EICHER: Alright, the June jobs report came out on Friday. 3.6 percent is the unemployment rate. Anything under four is pretty remarkable. But a few asterisks: job growth in June of just over 200-thousand has to be understood in light of the downward revision in April and May by a combined hundred-thousand, so the net is half of the June headline. But what does the new jobs report tell you, David?

BAHNSEN: Yeah, it was underwhelming. I wouldn’t say it was a bad report, but it wasn’t a good report. The downward revisions were the main reason why: 209 was a little less than the 230 that had been expected.

I think the bigger disappointment was that the ADP report for private payrolls was just massive the day before at 497,000; more than double would have been expected. So some people started to look to the BLS report for some validation that we were continuing to see accelerated job growth. And then that 209 figure came in and underwhelmed.

You add to that the over 100,000 of downward revisions from the months prior, and it sort of leaves the feeling of a mixed bag. The unemployment rate sits at 3.6%, wage growth was 4.4% year over year. That’s probably the best number in there, because it wasn’t so hot that it adds to this inflation fear. And yet, you don’t want wages going up less than the amount that prices are going up. You want real wage growth.

So all things considered it is another one of these data points we’re dealing with in this economy where it’s impossible to discern what direction we are taking with clarity. Both those that are desperately motivated politically to say the economy is doing great or the economy is doing terribly don’t get what they want out of reports like this. There’s a lot of mixed bags out there, Nick.

EICHER: And I’ll bring this up because it’s a systemic concern you’ve pointed to, and that’s the labor participation rate. June was no exception, again the number employed and the number of people actively seeking employment remains below the pre-pandemic level. Way too many people on the sidelines by choice!

BAHNSEN: Yes, but it’s not going to go back anytime soon, and that’s not something I think is a cause for concern immediately on the economic front because the economy saw its labor participation force drop significantly post-crisis, and it never did go back up.

The reason I give is that it’s sort of baked in economically. And yet my concern is cultural. My concern has to do with the soul of society. Right now, the vast majority of people leaving the workforce are people between the ages of 45 and 59, which is just not an age group that should be leaving the workforce. And I’ll add, it’s mostly men as well. You already have had the problem of way less people between 16 and 24 in the workforce. You already have the problem of a lot of people on the higher end having left the workforce; predominantly they did not come back after COVID. They did come back after the financial crisis. That was a lot of the baby boomers from 55 to 69 that still had a few years left in them, they have not come back post COVID, and likely are not going to. But even now you’re seeing prime working age people quitting at a high rate. These are things that I think speak to a society that has fallen out of love with work.

EICHER: So this is our first conversation in the 3rd quarter. We’re halfway through the year. Can you draw some conclusions at this point to evaluate the first half in the markets?

BAHNSEN: I think that the first half of the year was really driven by a handful of big tech companies, particularly those that are adjacent to artificial intelligence. You had an absolutely unprecedented level of disproportionality between a few big companies and the market overall. 10 companies out of 500, were responsible for 85% of the market’s return. Five companies right now represent 24% of the size of the stock market of the S&P 500: an all time high. The years that we’ve seen something like this before, Nick, were 1999, 2007, and 2021. None of those three years were even as bad as it is now.

But in those three cases, you know what happened the next year—you had quite a significant correction. It’s definitely a market environment where you’re getting a lot of speculation in relation to another shiny object. It’s not crypto this time, it’s not work from home stocks, it’s not the dot com of 20 plus years ago; this time, it’s AI. And it will end the same way. There will be some companies that will come out of it doing really well, but they’re massively overpriced right now. And so you’ll have a lot of companies that fail and never make any money. But this is human nature embedded and it plays out over and over again in the stock market.

EICHER: And Treasury Secretary Janet Yellen in China talking economic cooperation and competition. Any preliminary thoughts?

BAHNSEN: Yeah, I’m gonna have more to say on that when we talk next week, because you’re talking about trying to summarize four days worth of meetings. And I think that there’s a lot more analysis that will be coming throughout the next couple of days and more releases that the White House and the Treasury Department will provide. And also there will be info I’ll be able to get from some of my inside sources. I want to be able to give more thoughtful analysis.

Generally speaking, these trips are beneficial in terms of getting information. The question here is whether or not this trip is just cosmetic, or whether or not I will help lead to an actual Biden G meeting at the G20 in a few months. So I’ll come back with some more thoughtful commentary after a couple more days of analysis.

EICHER: So we’ll talk about that next week, then and speaking of next week, I know we’ll get a new consumer price number, which always generates a lot of stories.

BAHNSEN: I really think that the CPI number for June is going to come out here on Wednesday of this week. And right now it’s well over 90% odds in the implied probability in the futures market that the Fed will raise rates another quarter point at the end of July. And if the Fed is going to backtrack from that market expectation, the cover they’ll get will be from another big downward move in CPI this week. If that doesn’t happen, then perhaps the Fed will indeed want to go forward.

The jobs data last week gave them cover to go either way to either continue in their pause, or to hike again. We’re really at a high level of incoherence right now in Federal policy. So the CPI number in the next couple of days will be interesting.

And then really as a stock market guy I think the fact that we’re about to go into earnings season gives us something much more important to talk about: individual company earnings and results and what real enterprises are seeing on the ground. That’s what will start to be the story here other than this nonstop questioning about what the Feds going to be doing.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group. His personal website is Bahnsen.com. His weekly Dividend Cafe is found at dividendcafe.com.

David, thanks, we’ll see you next time. And in the meantime, I hope you have a great week!

BAHNSEN: Thanks so much, Nick.

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