Economy Shifting from Plow Horse to Race Horse

race-horseOctober started on a rough note for Wall Street, but last Friday’s strong monthly jobs report was a strong hint that the Plow Horse Economy is still galloping. That’s good news for both workers and investors.

The Labor Department reported that nonfarm payrolls grew by 248,000 in September and the unemployment rate dropped to 5.9% – down from 7.2% this time last year. Total civilian employment rose 2.3 million in the last twelve months. Average hourly earnings are up 2.0% in the last year, keeping pace with moderate inflation.

Pundits like to talk about a “Goldilocks” economy where everything is just right; not too cold and not too hot. Some sectors are getting warm, but the U.S. economy is in no danger of overheating. The latest economic numbers show that employment, wages and consumer spending are all picking up after a long freeze.Employment-Aug2014

This chart from JP Morgan Chase shows the economy has now generated more than enough new jobs to replace the 8.8 million lost in the last recession. Population has grown in the meantime and some of the new jobs may be less desirable than the old ones, but the economy is making real progress.

While I never place too much weight on any single report, this one came at an especially critical time. The Federal Reserve will likely take the final steps back from its post-crisis stimulus programs when it meets at the end of October. We should see a return to “normal” monetary policy with a slight interest rate hike next year.

After much protest, the big banks seem to have accepted that the era of free cash is over. They’ve decided they don’t mind because sustainable economic growth will give them other profit opportunities.

Will stocks head straight up from here? No, the market still has to overcome doubts. Companies need to show solid quarterly earnings reports over the next few week. Investors want to see both top-line and bottom-line growth. Falling unemployment will make it harder to pad profit margins with layoffs and outsourcing. Business competition will be harder than ever – but I think American business is up to the challenge.

Add to this that the stock market is now entering a historically favorable calendar cycle, and that bonds will still be unattractive despite slightly higher interest rates. All the pieces are in place for solid equity returns in the next few quarters.



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