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Good morning. Not long after most of you read this, the US jobs report for June will drop. There will be wild excitement, especially if the numbers diverge much from the consensus estimates of 720,000 jobs added and 3.6 per cent annual growth in hourly wages. I have no idea what to expect, other than a market overreaction. Unhedged is here to help you stay cool.
I’ll be on holiday until next Thursday, dropping my kids off at sleepaway camp for the first time. Wish me luck at robert.armstrong
Don’t freak out if the job numbers are not great
The US economy is humming, but we are still more than 7m jobs short of where we were pre-pandemic — despite strong demand for workers. When this unhappy fact is discussed, people talk mostly about government transfer payments keeping people at home playing video games, or people being stuck at home with their wretched children because schools are shut, or businesses refusing to raise wages because employers are mean.
Yesterday I asked Ioana Marinescu, a labour economist at the University of Pennsylvania, if any of this made sense. If the jobs numbers do disappoint, or even if they do not, what she had to say should reassure you that the jobs market is not going to be clogged indefinitely. Her points:
The speed of recent economic change makes it hard for businesses to decide how much to offer workers. This slows hiring down. “Employers have hard choices to make. Pay more? How much more? And they make these choices under uncertainty. Who knows, maybe someone will come [and take a lower offer]? Only when no one comes will they offer more.”
High labour demand means workers have choices, and they want to make the right one. This also slows hiring down. “Workers are not going to take the first job that comes along.”
Government payments may have lowered labour supply a little, but it has increased labour demand a lot. The payments meant that incomes did not fall, but spending did. Now that money is driving activity and labour demand. “Government cash benefits have played a major role in rising labour demand, but people only look at the disincentive side, which is a mistake.”
Labour markets in many parts of the US are dominated by a few employers, and monopsonistic employers are slow to raise wages. “This is a big reason employers are hesitant to raise wages. [In employer monopsonies] employees are paid less than what they produce . . . what makes it hard for employers [to offer a new employee higher wages] is that then they have to raise everyone’s wages.” Here is a map from one of Marinescu’s papers, with orange and red showing high and very high domination of the labour market by a few employers. Rural Americans don’t have a lot of job choice:
None of these sources of friction should be lasting, yay. If not this month, then some month soon, the market will start to clear. “If there is enough belief that there is a strong economy, employers are going to move. This is growing pains . . . and say the [economic] reopening doesn’t go so smoothly, that puts on the wood fire too, no?”
The Faangs are not an asset class
When the reopening/reflation trade wobbles — because of weak job numbers, hawkish noises from the Federal Reserve or whatever — the strongest pre-reopening trade reasserts itself. That trade is buying the Faang stocks, the huge American tech platforms that offer investors’ growth when the world seems to lack it.
Lately the reflation trade seems to have been have been winning. Here is a chart of the percentage returns on the S&P 500 index compared with the NYSE Fang+ index, probably the most common way to track the internet monsters, since mid-February (all the performance data is from Bloomberg):
Faangs flat! S&P marches up! Regime change!
Maybe not. What I consider the Faangs are the six canonical US technology monsters: Microsoft, Facebook, Apple, Amazon, Netflix and Google owner Alphabet. The Fang+ index does not include Microsoft, yet incorporates Twitter, Nvidia, Tesla, Baidu and Alibaba. This is all wrong. Nvidia and Tesla are hardware companies, not internet platforms. Twitter is too small. Baidu and Alibaba remain fundamentally China plays. Here is a cleaner comparison, the big six Faangs against the S&P 500 with those six companies removed:
The S&P 494 is still doing better recently, but not by much, and the big six have done just fine, thanks. US Big Tech is not yesterday’s trade.
As we think about the future of the Big Tech trade, though, the most important point that while the big six have collectively underperformed the wider market in recent months, individually the six have performed quite differently:
I don’t have a lot to say about how to explain this fan-like spread in performance. It is probably worth noting that the best performers, Facebook and Alphabet, are both in advertising, which is cyclical — and the reopening trade favours cyclical businesses. They are also both, by the standards of the group, value stocks. Here is a snapshot of the group’s growth and valuation characteristics. The data is from S&P CapitalIQ:
Facebook and Alphabet are two of the cheapest in the group on a price/earnings basis, and look even better when their P/E ratios are divided into their long-term growth rates. Netflix, a fast grower but the most expensive, has struggled. Why Apple, which also stands out as a relative value play among the group — look at its free cash flow yield — has foundered I don’t know. It does have the softest long-term growth in the group.
The point is that treating the Faangs (whatever you want to call them) as a monolithic asset class — as the flip side of the reflation trade, in essence — is a mistake. They are different companies, and they will perform differently in the months to come. As the world economy and market adjust to the post-pandemic world, which Fang you bet on is going to matter more than ever.
One good read
Something else to calm you down. Bill Dudley, former president of the Federal Reserve Bank of New York, has written on Bloomberg that, unlike in 2013, the Fed has a clear strategy for tapering asset purchases. “Officials are more confident, and market participants have a better sense of the game plan,” he writes. I’m not sure that transparent messaging and confidence were the problem then, or will make things easier now. But I sure hope he’s right.