Labor Market Woes Have Broad Consequences

Includes: SPY, TLT
by: Andrew Sachais

The past few articles I have written have been specifically about financial market flows, and their reactions to the outpouring of news and data. In this article the data itself will be analyzed in the context of why particular asset moves have made sense. There has been a common theme that domestically, in the US, our financial markets were vulnerable to international affairs, but our economy was on a gradual upward path. With the labor market information released today, it looks as if a decoupling between our economy and the world is premature. As well, our economy may not be in as fair a shape as most had previously believed.

The first chart is the unemployment rate. This statistic has fallen steadily since its peak in 2009, but has remained elevated above 8%. Much debate has been held whether the number is an accurate reflection of labor sentiment, due to various factors. One of those factors is the fluctuation of labor force participation. This chart below shows that a steady increase of labor participants have been exiting the force. In the current socioeconomic environment, it is almost a necessity to work later than generations past, so the concept of the early retirement of baby boomers will not suffice. However, a large outflow of discouraged workers would be a poor showing for the belief that the labor market is in fact improving.

Another knock on the economy was the weak change in nonfarm payrolls released today. This number vastly differed from projections, and as with any financial market indicator, when there is a strong negative surprise, markets sell. The chart below shows that not only have payrolls gotten weaker, but that projections have been overly optimistic the past few months. As a whole, this trend is very bearish for the US economic outlook.

On the news, equity markets furthered their decline. Along with a plethora of similarly negative headlines flashing across the globe, SPX futures (NYSEARCA:SPY) didn't stand a chance. This pushed the decline into 200 day SMA territory. The fact that it is the end of the week will cause any buyers looking for value to stay out of the markets until Monday. With the amount of current volatility, the weekend poses nothing but a threat of more bad.

Lastly, The chart above is of the 20+ year US Treasuries (NYSEARCA:TLT). These have caught a massive bid over the following month, and don't look to slow, considering the diminishing labor market outlook. In all, today's economic data did not do risk assets any favors, and requires that markets stay on pins and needles for further trading sessions.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in SPY over the next 72 hours.