Labor Is Leading This Market Higher

The Labor Data, Wow, 

We recently wrote a very compelling argument about why this market (NYSEARCA: SPY) was due for a correction and we stand by that position. This market is due for a correction but the timing, depth, and duration are questionable. In our view, a correction, if it comes, will set up the next truly great buying opportunity and that is what this article is about. Why the next correction will be a truly great buying opportunity. Why, in fact, you should be wishing for a correction right now. And it all comes down to labor.

You can call labor a lagging indicator if you want but that is not our experience. Our experience is that while some labor market indicators lag others, the trend in labor conditions tends to coincide if not lead the market and right now the labor data is pointing to rapidly improving conditions. Not to say there isn't still some weakness, or that some sectors, industries, and Americans are still impacted by the pandemic, only that strengthening labor market conditions are leading to improved consumer health and that is what will ultimately drive this market to new all-time highs. 

Labor Market Volatility Is Declining 

The first labor market indicator we want to point out is the weekly jobless claims figures. The weekly jobless claims figures fell to a post-pandemic low this week and indicate rapidly declining volatility in the market. The total number of jobless claims remains high at near 17 million but it too near the lowest level since the pandemic began and reveals the net balance of job creation is positive. With seasonal summer hiring already ramping, and that amplified by economic reopenings, we expect to see these declines accelerate and reach pre-pandemic levels by late summer if not sooner. Don't forget, the Total Claims data lags the Initial Claims by two weeks. This week's low in Initial Claims is yet to be seen in the Total Claims and there is more to the data than jobless claims. 

The Hiring Conditions Are Robust 

The JOLTs and Challenger, Gray & Christmas report on hiring/firing are very noteworthy because they back up the idea hiring conditions are robust. The NFP shocked the market when it came in over 1 million (with revisions) for March but that's nothing compared to what is to come. Based on the Challenger report hiring intent is on track to be the second-highest on record this year (we think it will accelerate) and the JOLTs report indicates a high level of open jobs. The JOLTs report shows, in fact, that job openings are near their record pre-COVID levels already and the most recent data is for February. We will not be surprised to see the April, May, and June NFP reports top 5 million and 10 million really isn't out of the question. 

The Most Unwatched Indicator You Should Absolutely Watch 

As great of a labor market indicator as the KC Fed's Labor Markets Conditions Index is it gets almost zero attention from the media. This indicator is a diffusion index of 24 labor market indicators, the 24 most closely watched by the FOMC, and it is pointing to a very strong economic expansion this year. The latest read is from March and shows labor market activity is still a hair below the expansion line but it is rising rapidly gaining 0.06 in the last month. The more important indicator to watch, at least for now, is the momentum indicator which rose "sharply" according to the KC Fed's statement. The important signal to watch for here is when Activity crosses above zero. This signal has a near-100% record of predicting mid-to-high-single-digit GDP growth only marred by the pandemic. We think the KC Fed Labor Market Conditions Index will make a positive zero-line crossover next month. 

Retail Sales Blows Past Consensus 

The March retail sales figures blew past the consensus. This is due in part to the stimulus don't get us wrong but it is also due to labor market conditions and it is the labor market conditions that will sustain the growth. The data shows retail sales grew at a near 10% MOM pace fueled by outdoor activity, sporting goods, and Food & Beverage. With the pace of the labor market improvement accelerating, we expect to see retail sales continue to grow at a substantial MOM pace if not quite this high. the Bottom line is that this equates to strong economic activity, continued demand throughout the supply chain, robust employment conditions, spending, and corporate profits. All of which adds up to rising stock market prices. If and when this market corrects we will be ready to buy it.