Global equity markets surged last week as news tied to the labor market proved utterly optimistic. The U.S. economy added 313,000 private sector jobs in February and the report revealed an upward two month revision of 54,000 jobs from December and January. Such stellar job gains within a labor market that the Fed has categorized as aging (another term for a tight labor market in the late stages of a business cycle) are amazing. The report’s upward surprise was further amplified on Friday by the sheer fact that not a single economist came close to predicting the outcome. Market expectations across a wide array of economic releases are typically dependent on those brave souls willing to make capital market predictions. This can pose a problem in the event that economic data points fall below such estimates given that market participants may view such data points in a negative light, a notion we don’t entirely agree with. On the other side of the spectrum, however, market participants are also highly influenced to boost risk assets higher (such as equity prices) when economic data points surprise to the upside relative to economists’ estimates. The labor market report last week, and the ensuing reaction within equity markets, was as a result of the latter. The Standard & Poor’s (S&P) 500 gained nearly 3.60% while the MSCI World Index closed the week higher by 2.91%. As global consumers, and investors, our investment management platform tends to gravitate significantly toward the MSCI World Equity Index rather than simply focusing on one index with the domestic equity market. Internationally, equities in developed economies, as well as emerging market economies, gained approximately 2% (MSCI EAFE and MSCI EM, respectively).
Sticking with the labor market story, it’s important to note that certain aspects of Friday’s report remain concerning. Of most importance, in our view, is the lack of wage growth that is not accompanying such strong job creation. Hourly earnings increased at an annualized pace of 2.6% as the unemployment rate held steady at 4.1%. At this stage in the business cycle, and especially considering the mature labor market, we would expect to see wage growth near 3%, if not above. It remains highly ambiguous as to why earnings are stagnating and it may pose a risk, we believe, in the inability of higher hourly earnings to create meaningful inflation in the economy. Although excessive inflation is never good, annualized inflation around 2-2.5% tends to promote current consumption and a well-functioning economy, despite the potential risks for slightly higher interest rates by the Federal Reserve. Part of the puzzle remains in the economy’s inability to generate meaningful productivity growth, which data released during the week indicated a figure that is well below the 3 year average, well below the 10 year average, and far below the 20 year average. Not even the Federal Reserve has been able to pinpoint why this is happening but it may help explain why wage growth is failing to notably move higher. Technological advancements and the potential failure in accurately measuring growth in such a sharing economy may be to blame.
In other economic news, growth was largely apparent in the non-manufacturing sector of the economy during February (i.e. services sector). The ISM composite indicated a notable expansion that has remained intact since February 2010. Data tied to consumer credit creation was also important. The economy experienced a notable decline since the near-term peak in November 2017. Current high credit card debt levels may be to blame, in addition to weak wage growth figures.
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.