On Friday the markets were surprised (again!) by the new jobs data. It's unclear to me how the expected numbers are so often nowhere near the actuals. Surely somebody centrally has access to the key data to know what the jobs market is doing, after all they will be collecting taxes from everyone!
Anyway the Non Farm Payroll update showed that employment had increased by 263,000 in November leaving the unemployment rate unchanged at 3.7%. So more jobs were created than expected and in addition the jobs created in October were revised upwards. Now if you're following this Fed Interest Rate Strategy you'll know that they are raising interest rates in a bid to reduce inflation. To reduce inflation they have to reduce demand and one of the ways to do this is to keep a lid on jobs. The downside of reducing inflation is probably going to be a recession but that is deemed a price worth paying to get the economy back under control and the rate of inflation back at 2%.
The theory being if the jobs market is tight (fewer people in work) then people don't have the money to drive up demand as they are only focused on buying essentials. OK that's a massive oversimplification of what the many well paid Central Bankers do but you get the idea: more jobs BAD, fewer jobs GOOD. So we were in the BAD category and the markets dropped by about 1.5%.
But if you noticed the week before it looked like inflation was slowing (that's in the GOOD category) and the Fed indicated that if that was the case a slow down in interest rate hikes would be required. Consequently the markets shot up by between 3 and 5%.
What this is telling us is how nervous and indecisive the markets are at the moment. Any data point with good news is seized upon and the markets go up and equally any bad news causes the markets to go down. This is happening because Banks and Financial Institutions need to invest money (that's what investors do right?) and currently they are sitting on a lot of cash they want to invest. BUT they don't want to get sucked into a bear market rally and end up sitting on a loss.
The other factor that is in everyone's minds is a recession. Most observers now feel that a recession in 2023 is inevitable so that means there will be a year of contraction or minimal growth. In that environment you don't want to be left sitting on investments for which you've overpaid, this again increases the nervousness in the market.
So should we take notice of the economic data and the constant updates that the Fed seem to give. Well, Yes and No.
If you're an Investor then you need to take notice of the directional data and take care which stocks you buy. Companies that are well run, with strong products/services and customers will always be in demand. But these may reduce in price so you need to shop around for value. Avoid companies that are heavily leveraged as the increase in interest rates is likely to increase their day to day running costs and ability to satisfy shareholders and pay back their loans. Importantly only make long term decisions, you should be thinking of a 5 to 10 year time horizon.
If you're a Trader then pay more attention to the timing of data releases and Fed speeches but don't worry so much about the detail. As discussed above, at the moment any significant economic update is moving the market which gives opportunities for both long and short trades so keep your eyes open.
When the data points are inconsistent and telling different stories then we'll continue to see the market flip flopping around and the Fed will have to act accordingly.
When the data starts to align it's likely that will be telling us we're in a recession and that the jobs market is tightening. After that we'll all be looking for 'olive branches' that tell us the recession is coming to an end and the markets will start reacting positively.
