MANHATTAN (CN) — Wall Street kicked off 2022 on a negative note, posting slight losses after a pair of conflicting jobs reports caused confusion on the state of the economy.
Failing to capitalize on the “Santa rally” from the last two weeks of December, each of the three indices declined during the first week of January. By the closing bell on Friday, the Dow Jones Industrial Average lost about 100 points, while the S&P 500 fell by 89 points. The Nasdaq suffered the worst, mostly due to a rout in tech stocks, declining 290 points for the week.
Mixed messaging from two major employment reports took their toll on investors. On Friday, the U.S. Bureau of Labor Statistics’ non-farm payroll data showed that fewer than 200,000 jobs were gained in December, more than half the consensus number expected by economists.
The news was disappointing, particularly since the data did not take into account most of the surge in Covid-19 cases due to the omicron variant. On the positive side, the unemployment rate fell 0.3% to hit 3.9%, a few tenths of a percentage point better than analysts had expected.
“Overall, this print had mixed messaging,” said Anu Gaggar, global investment strategist for Commonwealth Financial Network, who also also emphasized that the job market remains tight despite 600,000 more Americans still unemployed as compared with before the pandemic hit in 2020.
Gaggar, like many other experts, says the data should move the needle further for the Federal Reserve to act quickly and keep its focus honed on high inflation. “The combination of the decline in unemployment rate to below Fed’s long-term equilibrium level and acceleration in wage growth brings the Fed’s March meeting in play for the first rate hike of this cycle,” she said.
Earlier in the week, the Fed released minutes from its December 14 meeting, during which it indicated that in a couple months it would likely begin shedding the $9 trillion bond purchases from its balance sheet. That statement also gave a bit of a deadline for the first of possibly three interest rate increases.
“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” according to the minutes. The central bank noted most participants of its Federal Open Markets Committee viewed the trifecta of high inflation, surging economy, and a large Fed balance sheet as reason to “warrant a potentially faster pace of policy rate normalization.”
The Fed’s hawkish stance, coupled with middling jobs numbers, caused markets to drop, but others say the decline in equities after the Fed’s announcement shouldn’t be cause for a rout. Thomas Matthews, markets economist at Capital Economics, noted that “the economic backdrop that typically necessitates the start of a monetary tightening cycle — a strong economy and growing inflationary pressures — often features fairly rapid corporate profit growth.”
He said that usually happens at the end of the Fed tightening rates and bond purchases, but in this case economic growth is still going. “Over the next couple of years we still expect the economy — and corporate profits — to keep expanding at a decent clip, even if monetary policy is tightened somewhat,” Matthews said. “So for now, we don’t see much reason to expect the stock market to fall too much further.”
Part of the reason may be conflicting data. Two days before the Labor Department’s poor jobs report, the payroll company ADT’s own jobs report showed 807,000 jobs were gained in December — more than twice what many had expected.
Small- and mid-sized companies each accounted for about one-quarter of the total gain, while companies with more than 500 employees posted 389,000 new jobs last month. The breakdown among sectors was especially lopsided, with services outperforming the goods-producing sector nearly 5 to 1.
As for specific industries, the leisure/hospitality industry led the pack with 246,000 jobs gained, followed by trade/transportation/utilities at 138,000 jobs and then education/health at 85,000 jobs.
“December’s job market strengthened as the fallout from the delta variant faded and omicron’s impact had yet to be seen,” ADP chief economist Nela Richardson said in a statement. “While job gains eclipsed 6 million in 2021, private sector payrolls are still nearly 4 million jobs short of pre-Covid-19 levels.”
Both the ADT and Labor Department reports were compiled before omicron began to fully hit the United States, and some analysts predict a drop in payrolls for this month.
“The surge in infections is already weighing on demand in high-contact service sectors, but the bigger impact of the omicron wave will be on labor supply, as workers testing positive are forced to isolate,” Michael Pearce, senior U.S. economist at Capital Economics, told investors in a note, adding that it could be even worse as infections clock in at a record-high 1 million per day.
“With testing unable to keep up, the true infection rate is probably double that, meaning several million workers could be absent as the survey week for January approaches,” he wrote. “Since 20% of the workforce doesn’t qualify for paid sick leave, the hit to January payrolls will run into the hundreds of thousands.”
Continuing on the negative side, the Bureau of Labor Statistics reported a record 4.5 million Americans quit their jobs in November, up from the previous high of 4.3 million in September.
Most of the numbers from what is being called “The Great Resignation” predictably have come from the leisure and hospitality industry, which saw 1 million workers quit in November, with nearly all of that number coming from the hotel and restaurant sector.
Other sectors saw a notable pickup in quits, as well. Health care and social assistance workers saw a slight increase to hit 600,000 workers in November, while professional and business services also saw an uptick of about 60,000 quits. Surprisingly, retail saw fewer quits in November, though that could be due to holiday sales.
Fewer job openings were posted in the so-called JOLTS report than were expected, hitting 10.5 million compared to the 11 million many analysts had forecasted and less than the 11 million see in October. The financial sector saw the most notable increase in job openings, from 450,000 in October to 538,000 in November, while leisure and hospitality also dipped from 1.7 million to 1.4 million during that same period.
Another jobs data point that has continued to creep back up is the number of unemployment claims. On Thursday, the Labor Department reported that 207,000 workers filed initial claims for the week ending January 1, an increase of about 7,000 from the prior week. Claims have hovered around 200,000 per week since December, a few weeks after hitting a record low of 188,000 claims at the end of November.
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