The significant rebound in the labor market that occurred in January despite the Omicron virus is encouraging for workers — but Wall Street is less enthusiastic. Following a surprisingly strong jobs report in January, which showed gains of 467,000 jobs in the month, the stock market plummeted.
Market participants are concerned that the transition away from the ultra-loose monetary policy will be faster and bumpier than anticipated, which will cause stocks to decline.
Economists believe that a strong labor market is beneficial to the economy and that a certain amount of wage inflation will benefit low-wage workers.
Despite a decline of approximately 100 points in the Dow Jones Industrial Average at midday, a positive quarterly earnings report from Amazon helped to mitigate a similar decline in the tech-heavy Nasdaq.
“Based on the expected path of Fed tightening this year, I think there could be a little bit of that ‘bad news is good news’ feeling,” said Mark Heppenstall, president and chief investment officer of Penn Mutual Asset Management.
Inflation is at 40-year highs, and the market is pricing in a Fed that will raise rates numerous times — and possibly in larger increments — in the coming months.
Stocks have been jolted and market volatility has been agitated in recent weeks as traders digest the prospect of slower economic growth and the implications of higher borrowing costs on companies that rely on cheap money to expand.
“The market is more concerned about the outlook for inflation than the outlook for growth at this point, especially given the intense focus on Fed policy,” said Zachary Hill, head of portfolio management at Horizon Investments. “The market is more concerned about the outlook for inflation than the outlook for growth at this point,” Hill added.
Prior to the release of the jobs report, the CME FedWatch Tool predicted a 13 percent chance of a half-percentage-point rate hike in March. It had increased by 20 percentage points by the time the poll closed three hours later.
There has been a lot of volatility, to put it bluntly,” Heppenstall said. “It appears that the markets are pricing in a very aggressive Federal Reserve for the remainder of the year.” On the other hand, a weakening job market would lead Wall Street to believe that the Federal Reserve will put a halt to its plans to tighten policy.
The tension that exists between Wall Street and Main Street presents a challenge for policymakers who are attempting to steer the economy into a new phase of post-pandemic normality.
According to Cliff Hodge, a chief investment officer of Cornerstone Wealth, “the jobs numbers that we received in the revisions blew away even the most optimistic expectations.”
According to him, “if you take a look at headline numbers and the increase in the labor force participation rate, these are all very positive factors for the economy,” but the market’s reaction makes sense if you look at it through the prism of how the Federal Reserve might react.
Additionally, annual revisions revealed that job growth throughout 2021 was both less volatile and more robust than the initial survey results had indicated. This was in addition to the strong monthly numbers.
According to the revision, the total number of jobs created increased by 684,000 to 7.1 million, resulting in an average monthly gain of 555,000 jobs.
“What you’re seeing is a lot of strength in labor, and you’re seeing really hot wages, which indicates that inflation is on the way.” “It gives the Fed the green light to be more aggressive,” Hodge explained.
According to industry experts, it is still a buyer’s market for workers, and there is increasing evidence that more people are being drawn back into the workforce as a result of a reopening economy and higher wages.
With the labor force participation rate rising to 62.2 percent in January, the rate had been hovering around 61.9 percent for several months. This represents a significant increase.
We believe that most of the increase in participation is due to the revision, but there is one bright spot: labor force participation has been higher than we had anticipated. According to Daniel Zhao, senior economist at Glassdoor, “this indicates that workers are returning to the labor force and finding jobs.”
The aggregate labor market has still lost 2.9 million jobs since the outbreak of the flu, but employment in a few sectors — most notably transportation, warehousing, and retail — has actually increased above levels seen in February 2020.
“What this report emphasized is that despite concerns about labor shortages, we had a steady flow of workers back into the labor force,” Zhao said.
One important component of this is rapidly increasing pay. Gallagher Consulting found that 15 percent of employers reported that they had increased compensation by 10 percent or more over the previous six months in order to combat labor shortages in a survey of nearly 400 companies conducted in January.
According to government data, there has been a 5.7 percent increase in all sectors from the previous year.
‘Inflation can often be viewed as one of the greatest equalizers in the economy,’ says Robert Cantwell, portfolio manager at Upholdings Asset Management. “It has the potential to raise wages for millions of people at the same time… It remains to be seen whether or not we will be able to accomplish this goal this year.”
On the other hand, inflation has the potential to erode those wage gains. With a 13 percent increase in wages, the leisure and hospitality industry is also the only one in which wage growth is keeping pace with inflation.
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As a matter of political theory, wealth inequality has long been a major concern. According to Hodge, “the Biden administration and the Democrats in power want to see inequality reduced, and as a result, there is a great deal of political pressure to raise wages.”
Government policymakers at the Federal Reserve are likely to maintain their focus on containing rising prices, even if this results in an outburst on Wall Street, according to Hodge.
“They will proceed with their plan on hikes, on balance sheet normalization, and on supporting Main Street at the expense of the markets,” says the president. “I believe that investors should be prepared for increased volatility,” Hodge stated.