Have you ever watched something change right in front of your eyes? There’s something about noticing the smallest shift and intuitively feeling things are about to change on a bigger scale. For me recently, it was a text: “call me when you can, everything is ok”. I instantly knew everything was not OK and about to change.

And in another part of life, it felt like that reading the jobs report on Friday. I was rushing to the subway — trying to read the tiny print from the Bureau of Labor Statistics on my phone while walking. The headline — an increase of 275,000 jobs — initially told me everything was going to be OK. But, after reading the details from the train, I wondered whether that was true. And what it means for future interest rates, and most importantly, for the consumer, who, along with AI, has been holding up this economy. 

Details that made me go hmmm (as I write this I now have that C+C Music Factory song in my head):

• Revisions for January and December added up to -167k jobs

• Unemployment ticked up to 3.9% vs 3.7%

• Household survey showed 184k less people were employed

A mixed report like this is in line with what the Fed wants to see to get closer to lowering interest rates. Until this report, it seemed like rates could be destined to stay at current levels for longer than expected. This is because the labor market has been strong (higher quit rates, low unemployment, strong job growth) and economic growth has been pretty good thanks to the consumer, particularly in services, while inflation has stayed stubborn in parts of the areas measured (also services). See charts below.

After all, higher interest rates aim to soften the economy and job market to ease demand and, thus, inflation. And the goal hasn’t seemed to be confidently achieved. So I thought the market and economy would carry on.

But there are two things making me reconsider

1) The number of people employed (vs jobs added) has started to fall more regularly:

2) Intuited from watching Q4 earnings reports and according to data from Factset, 70% of companies issuing guidance for Q1’24 were negative (well above averages for the last 1, 5, and 10 years) and 52% of companies issuing guidance for 2024 were negative. Meaning, companies expected lower earnings/revenue than the market expected. Given companies generally optimize for profit, it’s possible they start cutting costs, leading to a continued softening of the job market. 

So the key question becomes, how soft does the economy get and does that mean the market is overvalued now? 

Our broad view is right now we believe the signs of a softer economy are a normalization after a strong job market post-Covid and that any further softening in the labor market will not be deep enough to drive growth very low. That being said, job losses are stressful to the consumer, no matter how many there are, so we are watching closely. If we get above 4.5-5% on the unemployment rate quickly, then the R word could be coming into play.

As for the market, I believe the growth we’ve seen in areas like high-growth tech deserve a near term breather. Taking a couple chips off the table can be prudent for any investor. But the earnings growth, thanks to AI and other secular trends, that drove prices higher is substantial and unlikely to greatly drop longer term. The rest of the market has not been as strong and carries a reasonable valuation. 

But, hey, nothing ever goes up in a straight line (at least not forever), or changes uniformly.