Market Insights is a piece in which Kensington’s Portfolio Management team will share interesting and thought-provoking charts that we believe provide insight into markets and the current investment landscape.
Rate Cuts Amid Weakening Labor Market
Last week, the Federal Reserve held its September Federal Open Market Committee (FOMC) meeting, where it made a somewhat surprising move by cutting the target range for the federal funds rate by 0.50%, bringing it to 4.75%–5%. Leading up to the meeting, market expectations were split between a 25bps and 50bps rate cut. The larger move suggests that the Fed sees diminishing upside risks to inflation and increasing downside risks to employment.
As we’ve discussed in previous editions of Market Insights, the Fed's dual mandate is to maintain low inflation while maximizing sustainable employment. The decision to cut rates more aggressively, by 0.50%, reflects concerns about a weakening labor market. High borrowing costs can discourage business investment, which in turn reduces hiring, something we've seen in recent months. In August, the US Bureau of Labor Statistics (BLS) reported 142,000 new jobs, but also revised down the June and July jobs data. Additionally, in late August 2024, the BLS released revisions to payroll jobs for the 12-month period ending in March 2024, reducing previous reports by 818,000 jobs—a 0.50% downward adjustment over that period (see chart below).
Source: US Bank as of September 6, 2024
Job Openings Shrinking
The labor market has also experienced a reduction in job openings. Previously, there were far more open positions than available workers, but this imbalance has started to level off. By the end of July, the US had 7.7 million job openings compared to 7.1 million unemployed persons, according to the BLS. The “Worker Demand Gap”—the difference between job openings and unemployed workers—is now at its lowest level in over three years (see chart below).
Time to Panic?
Despite slowing job growth, it may not be time to sound the alarm just yet. While the August unemployment rate stood at 4.20%, down slightly from 4.30% in July, this is still considered a favorable level. However, a potential concern arises from the fact that, historically, once unemployment starts rising, it tends to continue doing so (see chart below). The rate has been slowly, but steadily, increasing since its low of 3.40% in April 2024.
Market Impact
Rising unemployment typically has a negative effect on equity markets, as the two have maintained an inverse relationship over the long term. However, this relationship is not always straightforward and can be influenced by various other factors (see chart below).
Source: StockCharts.com as of July 1, 2023
Despite these labor market concerns, the broader market remains relatively unconcerned. The S&P 500 recently hit its 40th all-time high, and high-yield credit spreads—often viewed as a "canary in the coal mine" indicator—continue to hover at historically low levels (3.10% as of September 19, 2024), only spiking briefly during the market volatility in early August.
Equity markets, in fact, appear to be in the earlier stages of a bull run that began on October 12, 2022. Since then, the S&P 500 has risen by approximately 60%, which is below the historical average for bull market rallies, both in terms of percentage gains and duration. Since 1950, the average bull market has lasted 1,131 days (the current run is around 490 days) and delivered a 152.80% gain. This means we may be less than halfway through a typical bull market (see chart below).
Source: Grant Hawkridge, All Star Charts as of September 19, 2024
Bull Markets: Recession vs No Recession
However, this comparison can be misleading. As Doug Ramsey, CIO of The Leuthold Group pointed out in the firm's September Green Book research report, there's a clear distinction between bull market rallies that begin during a US recession and those that start without a preceding economic contraction—our current situation falls into the latter category.
As the chart shows, bull markets following recessions have significantly outperformed those without a prior recession, with the former delivering an average of 123% more gains and lasting over two years longer. When viewed through this lens, our current bull market run is closer to the historical average in terms of both percentage gains and duration.
Navigating the Uncertainty Ahead
As we move forward, the central question remains: Can the Federal Reserve stay ahead of the weakening labor market and guide the economy toward a soft landing? Or will the recent trends signal the eventual end of the current bull market? The Fed's ability to manage the delicate balance between inflation and employment will be crucial in determining whether this rally has further to run or if we are nearing a turning point.
In these uncertain times, tactical strategies may play a more important role in navigating market volatility. By staying adaptable and responsive to changing economic conditions, investors can better position themselves for whatever lies ahead.
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