the watershed June 2014 Employment SItuation report

The Bureau of Labor Statistics of the Labor Department issued its monthly Employment Situation last Thursday, a day earlier than usual because of the Fourth of July holiday.

The results were very good news for the economy.  A whopping 288,000 new positions were created during the month; job gains were widespread; inflation–meaning wage gains–remained low.  This was everything the country’s economic managers could have asked for.

In addition, revisions to prior months’ data were positive.  The final number for April rose by +22,000 to +304,000; May job gains were revised up by +7,000 to +214,000.

Over the past three months, then, the US economy added jobs at the rate of +272,000 a month.  If we figure that the economy needs +125,000 new positions to absorb new workers leaving school and entering the workforce for the first time, then the US is currently eating into the pool of workers left unemployed by the Great Recession at the rate of about +150,000 a month.  At this clip, the economy would be pretty much back to normal employment-wise in a it over a year–at least according to the official statistics.  

For the stock market , this is a good news – bad news situation.  On the one hand, the economy appears to have finally turned the corner.  On the other, stocks barely budged on the day of the report and are down since–meaning that, although the good news may have come earlier than most had expected, its arrival had already been fully discounted into today’s stock prices. 

My guess is that in the strange way the mind of Wall Street works, from now on the ES can’t be a positive for stocks.  It can only be a negative.  Market-moving news will either be that job growth is flagging or that wage inflation is becoming significant.  Continuance of job growth at a +200,000+ monthly rate will be greeted wit ha yawn.

If I’m correct, I can imagine two investment consequences for stocks, assuming professionals can tear themselves away from their vacationing in the Hamptons:

–investors will begin to pay much more attention to the EU and China as sources of economic strength/weakness, and

–thinking that the current domestic situation is about as good as it gets, the market will begin to look much more carefully at the PE multiple being paid for owning a piece of it.  This would imply that while there will continue to be less brass tacks and more “dream” in the pricing of foreign-sourced earnings, the opposite will hold true for US-base profits.  In simpler language, the overall market multiple will likely contract a bit as investors absorb the implications of this ES.  I also have to figure out whether it makes sense for PSI to monitor this report so closely from now on.


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