Why Market Declines Are Met With Market Rallies

Market volatility of late concerns more than tweets, who delivers your packages, and risks of trade wars. While the President’s comments via Twitter and from the podium have added to market uncertainty, the week’s economic data is rather quietly (as far as the media is concerned) telling a story of it’s own.

Year to date, major stock averages are largely flat, but the ride has been anything but with swings as large a 700 points on the Dow or almost 3% in a day. These moves can be disconcerting.

The headline drivers of the markets’ volatility, have included Facebook’s security issues and Amazon’s below cost contract with the US postal system to deliver its packages.

The larger headline concerns have been what China plans to do in retaliation to Mr. Trump’s tariffs of their imports and business practices.  By no measure has China been a fair player in global trade and respect for intellectual property, and they are being called out for it. It appears they have hit a wall with Mr. Trump. Washington’s laissez-faire attitudes toward China’s trade practices are noisily and abruptly ending. What happens following plenty of closed-door negotiations remains to be seen and we will follow. But these are not the point of today’s Brief.

It has been a busy week of economic data releases and they seem to be telling a story that is largely ignored amidst the more colorful headlines. The ‘real’ economy is stronger than it used to be.

ADP’s Employment report shows continuing strength in private payrolls. It’s last five months’ reports have show strong growth in hiring. Today’s Employment report from the Department of Labor, showed unemployment remained steady at 4.1% with 103,000 new jobs and hourly wage earnings ticking up 0.3%. While job growth wasn’t as strong as earlier projected, the lack of wage pressure gives the Federal Reserve a little breathing room on the need for rate increases to stem inflation concerns.

Another employment report known as Jobless Claims monitors the number of individuals who file for unemployment insurance for the first time. An increasing (decreasing) trend suggests a deteriorating of improving labor market.

As you can see, there are ups and downs, but the trend is decidedly downward.

An article in today’s Wall Street Journal titled “The Future of America’s Economy Looks a Lot Like Elkhart, Indiana.” The capital of RV manufacturing, which once had the worst unemployment rate in the U.S., is now facing labor shortages and rising home prices and wages.

The article opens “High-school students around here skip college for factory jobs that offer great pay and benefits. For-hire signs sprout like roadside weeds. And workers are so flush that car dealers can’t keep new pickups on the lot.

At the same time, the strains are showing. Employers can’t hang on to employees, and house prices are zooming. The worker shortage prompted a local Kentucky Fried Chicken restaurant to offer $150 signing bonuses. A McDonald’s failed to open for lunch last fall because managers couldn’t corral enough hands at $8 an hour to serve the lines waiting at the door.”

But it doesn’t look like labor shortages this time will hold back our growing economy or cause significant inflationary pressure either. Another article in today’s WSJ entitled “Tariffs Unlikely to Bring Back Many US Blue Collar Jobs, Study Finds.”

As demonstrated in the chart below, US manufacturers have produced more with fewer workers.

The article says the reason is “manufacturing firms, some facing pressure from China and other lower-cost, overseas competition, have automated low-skill, routine tasks and became more reliant on robots and college-educated workers to boost production.”

The study goes on to to say “The manufacturing sector is no longer the disproportionately important source of employment for the less-educated that it was in the late 1970s and early 1980s,” the study said. At the same time, the share of manufacturing workers who are college educated has grown sharply.”

“One reason fewer of those former manufacturing workers are employed–in any field–is the unfolding opioid epidemic. The study found that a decline in local manufacturing employment is related to rising opioid use and related deaths.”

Our economy is growing, but not all households are realizing the same gains as they saw in the past. The classic dynamics and linkages are no longer as powerful as they once were. Rising factory output has more to do with increases in technology and robotics than with hiring people. Wages for most are rising, but at rates that are pretty much in line with inflation.

It remains to be seen if increasing domestic production, and it is increasing, will improve job prospects for America’s blue color workers. The clear message is that while some traditional jobs in steel, oil, and others will be available without much re-training, for most, the classroom will be a necessary first step to employment in America’s changing economy.

The stock market’s volatility will likely continue as long as trade wars, potential tech regulation, and global economic health remain in the headlines. But the economy is growing and that fact, as long as it is a fact, will keep a floor under the market.