This week, RFA’s Strategic Manager – Wealth Management, Bradley Johnston, CFP®️, ChFC®️, MSBA, takes a brief look back at Q1 2022, discusses whether the U.S. could be headed for—or is perhaps already experiencing—stagflation, and shares the latest numbers on the labor market.
Welcome to the Weekly Market Update. This week brought the end of the first quarter of 2022, and what a quarter it was. The headlines were filled with scary news of the surging Omicron wave of the pandemic, the worst inflation in 40 years, the Russian invasion of Ukraine, and the Federal Reserve sounding much more hawkish than investors expected. Stock prices were whip-sawed by these headlines. And yet, when the dust settled the S&P 500 was only down around 4%, displaying remarkable resilience. Soon we will be in the thick of first quarter earnings season which will give us a better idea of how our companies are doing. But this week let’s take a look at the hot topic of stagflation and the latest readings on the labor market.
There is an ongoing debate in the financial world over whether the U.S. economy is headed for, or already experiencing, a period of stagflation. The ongoing war in Ukraine has only added to these fears. Stagflation refers to an economic condition characterized by high inflation and falling or weak growth, sometimes with high unemployment. The last instance when the U.S. economy endured stagflation was in the late 1960s and 1970s, which was also a time characterized by rising oil prices. Given tight oil supplies in the current environment coupled with the risk to energy markets tied to the war in Ukraine, some fear that the risk of stagflation in the U.S. and around the world is rising, and we could be headed for an outcome similar to the 1970s. Fortunately, comparisons to the 1970s do not have much merit. Inflation during the 1970s was roughly double what it is today, and the Fed ultimately raised interest rates to nearly 20% by 1980. And we spend far less on food and energy today than we did 40 years ago. As you can see in this first chart, food and energy represent roughly 10% of consumers’ budgets today compared to 20% in 1980. Current inflationary pressures are showing early signs of easing, and the Fed has plans to raise the Fed funds rate to about 2% by the end of the year, which is a far cry from where policy landed in 1980. The 1970s also featured government price controls that constricted energy supply, which does not apply today. The leading economic indicators continue to portray a strong domestic economy, and the labor market is extremely strong.
This week we got several views on the strength of the labor market. On Tuesday, the Labor Department released their Job Openings and Labor Turnover Survey, or JOLTS report, for February. As we can see in this first chart, the number of job openings reached 11.3 million, above expectations and down only slightly from January’s record high. The size of the labor market has not increased that much so, as we can see in this second chart, the ratio of the number of unemployed to job openings has plummeted to a new record low, well below 1. Looked at another way, with the pool of unemployed around 6 million, the number of jobs openings per unemployed person is 1.8. Workers can sense this positive situation.
This next chart is the Conference Board’s labor differential chart, which is the difference between those saying jobs are easy to get and those who say that jobs are difficult to get. As you can see, this measure of labor sentiment is at an all time high. On Wednesday, payroll processor Automatic Data Processing released their report on the increase in private payrolls, which was 455,000 for March, continuing a string of strong reports around a half million, as we see in this chart. On Thursday Initial Jobless Claims came in at 202,000, ticking up slightly but still near recent lows, while Continuing Claims hit their lowest level since 1969. And on Friday, the Labor Department reported an increase in Non-Farm Payrolls of 431,000, below economists’ expectations for 490,000, while prior months were revised up strongly. The Unemployment Rate dropped to 3.6%, a post-pandemic low and closing in on the February 2020 low of 3.5%. Even with everything else going on, the jobs market continues to strengthen. This will certainly embolden the Fed to move more aggressively.
So, what does it all mean? There is much about which to worry, not least the outcome of the tragic war in Eastern Europe. The future is unknowable and thus most forecasting is futile. What we do know is that your portfolio is filled with great companies which have shown time and again that they can navigate challenges. We also are fortunate to live in a country with strong institutions and blessed with abundant natural resources. We are likely to come through all of this in better shape than many others. So please, sit back, relax, have a great weekend and join us next time for the Weekly Market Update.
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This week, RFA’s Director – Wealth Management, Gabrielle Reilly, CFP®️, GFP (USA), MSBA, covers the latest developments in the job market and inflation, shares the most recent earnings report from RFA holding Oracle, and discusses Amazon’s upcoming stock split.