With Labor Day right around the corner, we’re talking with Brian Jacobsen, Senior Investment Strategist on the Multi-Asset Solutions Team, to examine some current and key market and labor statistics and see if we can decipher what we might expect for the remainder of 2021.
Brian Neuman: I’m Brian Neuman and you’re listening to On the Trading Desk®.
In this episode, we’re talking with Brian Jacobsen, Senior Investment Strategist with the Multi-Asset Solutions Team.
With Labor Day right around the corner, we thought it would be interesting to examine some current and key market and labor statistics and see if we can help decipher what we might expect for the remainder of 2021. Welcome back to the program, Brian.
Brian Jacobsen: I’m really happy to be here.
Brian Neuman: So for our audience and as a bit of quick background, while most of us think of Labor Day as an extra day of vacation, symbolizing the unofficial end of summer, in reality, the national holiday was first enacted by Congress and signed into law by President Grover Cleveland in 1894.
Designated as the first Monday in September, Labor Day, as the name suggests, is a creation of the labor movement and is dedicated to the social and economic accomplishments of American workers. It’s truly a tribute to the strength, prosperity, and well-being of our country.
Brian, for starters, I think the natural question is what’s the data saying about our labor market right now and is there a direct takeaway for the markets?
Brian Jacobsen: Well, most people are probably going to hate this type of answer, but honestly, it depends. It depends on who you are.
The employment-to-population ratio, which is a very broad measure of labor market health, looks at the fraction of the working age population that’s employed. As of July, that was 58.4% and that’s about the average over the last 75 years.
But the thing is we don’t want to be average. I mean, if you think back through history, the Civil Rights Movement helped bring minorities and women into the labor force. From 1964 to about 1999, that employment-to-population ratio was on the increase. It went from 55% to over 64%. After the tech bubble popped and the global financial crisis, the ratio dropped to 58%, and that’s about where we are now, and it took nine years after the global financial crisis to get above 60%.
So the COVID recession saw that that employment-to-population ratio plummet down to 51%. So we’ve made progress, but not nearly enough.
Brian Neuman: So amidst this conversation, I think it would be really hard to ignore the recent news and the impact of the delta variant, as long as we’re talking about COVID. Companies that once had plans of having staff return to the office this fall have pushed return dates back to even early 2022. Are there certain sectors, maybe geographic regions, that you expect to be more adversely affected as a result of the emergence of the delta variant?
Brian Jacobsen: Yes. We will see what the data say, but it looks like people are changing their behavior even without government mandates.
During COVID, consumer spending shifted from a lot on services to quite a bit on goods, things like computers and toilet paper. Different goods as opposed to services.
But then with fewer fears of COVID, the pendulum was swinging back to more service sector spending. And when I talk about service sector spending, that’s things like going out to restaurants, travel, tourism, things like that.
Well, the delta variant is affecting people’s behavior. People are spending a little bit less on those things than what they otherwise might have wanted to. But the delta variant doesn’t just affect demand for goods and services. It also affects supply. Job openings are at record levels, and many service firms have found it hard to fill vacant positions. And so that’s meant trimming hours and raising prices.
When I look at by sectors and industries, the unemployment rate in the leisure and hospitality industry was 25% in July 2020. And in July 2021, it fell to 9%, but that’s still way too high for a full reopening when you consider that the overall unemployment rate is something closer to 5.5%.
Brian Neuman: Now if we pivot for a moment, much has been written and discussed about inflation, and it’s certainly a topic that is front and center for investors of all kinds. What are you noticing about inflation right now, and is there a correlation with any of your prior comments about the labor stats?
Brian Jacobsen: They are related. Economists like to simplify things and think about inflation as either being caused by demand or supply, or sometimes both.
And during the pandemic, thanks to lots of stimulus money, households’ incomes actually increased. That caused a lot of businesses to be kind of off guard, because the typical recession playbook involves cutting production, discounting items, and drawing down inventories.
But this time, demand surged and we now have businesses scrambling to increase production and rebuild inventories.
Initially, inflation was mainly in energy with higher oil prices, or we saw it with airline and hotel prices as prices collapsed during the pandemic and then even a modest recovery would look like a rapid increase in inflation.
But since the 1990s, goods prices have generally fallen, and over the last few months, we’ve actually seen those prices rise due to supply chain issues. So those supply issues should, we think, resolve themselves, but it’s difficult to forecast when. Supply is more or less flexible depending on the industry, so this inflation experience is likely to be very uneven.
I like to think of this as being more of a period of rapidly changing relative prices more than the beginning of an era of permanently higher inflation. We just have to work our way through that demand surge and now supply trying to catch up.
Brian Neuman: That’s an interesting perspective. You know, many of us are familiar with the old Wall Street adage “Sell in May and go away,” which has historically referred to a period between May and October when the market, on average, underperforms the prior six months. With Labor Day marking the unofficial end of summer, is it time to get back in or might it have been better to stay invested all along?
Brian Jacobsen: Yeah, you know, old adages, they usually have some basis in reality. I mean, that’s how they become adages, right? They’re widely shared, widely believed.
But this one is a little dangerous in that it kind of borders on trying to time the market without thinking about whether it’s really worth the price. The saying was “Sell in May and go away, come back again after St. Leger’s Day.” And St. Leger’s was a horse race in the United Kingdom that was in September and that typically marked the end of the summer holidays.
But the idea is that brokers, they would want to clear their books for the summer and then go away on long holidays. But I don’t know about you, I don’t know many people who actually go away for the entire summer. And also with computerized trading, I don’t know how many people are actually going to not only be on vacation but who are going to turn off their computers with the electronic trading.
So when I’ve looked at the statistics on this, since the 1950s, there’s a small but statistically significant decline in average monthly returns in August and September, but like I said, it’s significant but small, so you have to ask is it economically significant?
And on the other hand, it’s typically higher in November and December. But again, these are small numbers and you have to ask is it really worth the transaction costs?
And then plus, when you think about the daily volatility of the markets, if you get the timing of the trade wrong—if it’s in the morning, is it at night, is it at the low, is it at the high—that could wipe out the entire benefit.
So when thinking about some of those timing issues, transaction costs, I think that’s why a lot of financial advisors would probably agree that it’s best just to stay the course.
And why do we observe this pattern? Well, it’s hard to say. But when I looked at the market drawdowns over the last decade or so, a lot of them tended to happen during the summertime.
If you just think back, I think 2015, 2016, we had some that was associated with China depreciating their currency. I don’t think that had anything to do with the summer, right? We had the Greek debt crisis in 2010 and then 2011 again. Again, I don’t think that had anything to do with the summer. There were double dip recession fears in 2002. In 1999, you had the Fed (Federal Reserve) talking about hiking rates. In 1998, you had, in August, the Russian debt default. You had the Gulf War in 1991.
So all of these things, well, maybe it’s just a coincidence that they tended to happen during the summertime and there’s nothing really special about the summer itself.
Brian Neuman: Well, one thing’s for certain. As we turn the page on summer 2021, we’ll have a keen eye on partnering with clients to navigate the challenges that fall and winter may bring. Brian, is there a last thought you’d like to leave our listeners with today?
Brian Jacobsen: Yeah, there’s always something to worry about. I was reflecting back on how I write a weekly note that’s on our blog about what’s happened in the markets and what’s to come, as far as the economic calendar. And I’ve done that for about five years where it’s been on there. The fourteen years before that, I did it on a more ad-hoc basis.
And looking back at my notes, I averaged a note probably at least a couple times a week. So there was never a week where there wasn’t something to worry about.
So for fall and winter, what’s the shifting narrative going to be about? It’s probably going to be lots of talk about whether we’re past peak growth for earnings, whether the Fed will taper too quickly or hike rates too soon, maybe about Congress, can they get their act together and pass a budget, or something else.
So that worry that tends to always be there actually, I think, presents opportunity. Not every worry becomes reality. Few worries are actually worth worrying much about. And so don’t let worry steal your joy, but also have a plan, and don’t let worry derail you from sticking to it. Because if it derails you from sticking to your plan, it could derail you from achieving your financial goals.
Brian Neuman: You’ve left us with a lot of great things to think about and we really appreciate you sharing your insights with us today. I hope you have a great Labor Day.
Brian Jacobsen: Thank you. You, too.
Brian Neuman: That wraps up this episode of the On the Trading Desk podcast. If you’d like to read more market insights and investment perspectives from our investment teams, you can find them on our AdvantageVoice® blog.
To stay connected to On the Trading Desk and listen to past and future episodes of the program, you can subscribe to the podcast on iTunes, Stitcher, Google podcasts, Spotify, and Overcast. Until next time, I’m Brian Neuman; stay invested.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.