Stocks closed in the red on Friday as investors digested a key report on the labor market’s recovery. Luke Tilley, Wilmington Trust Chief Economist and Jon Maier, CIO at Global X ETFs joined Yahoo Finance Live to discuss.
Video Transcript
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SEANA SMITH: Just about a minute to go here until we wrap up things for the trading week. We have Luke Tilley. He’s Wilmington Trust Chief Economist here to help break things down, as well as Jon Maier, Chief Investment Officer at Global X ETFs. Let’s take a look at where things stand, because we’re seeing some selling into the close, although it looks like the Dow is now back in positive territory, well off the highs of the day, up just 7 points, so anything can happen in the next 45 seconds or so.
S&P and NASDAQ both in negative territory. The S&P off just around 2/10 of a percent. The NASDAQ off about a half of a percent. In terms of the sector action, we’ve been talking about that this hour, energy by far the leader today. That has been the case all day, with the XLE just around 3%.
But we’re seeing pretty much losses, then, across the board. Real estate, technology, utilities underperforming today. Communication services, consumer discretionary, and consumer staples among the worst performers in the market today.
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BRIAN CHEUNG: And there is the closing bell wrapping up this Friday’s market action on this October 8, also wrapping up the week. You can see that it’s in the red. The Dow actually just barely ending the day in the red. The S&P 500 down about a 2/10 of a percent. The NASDAQ down about half of a percent. Again, the real only winner sector-wise was energy and financials just by a little bit.
But let’s get the market– the session going. As Seana intro, we have Luke and Jon, Luke from Wilmington Trust and Jon from Global X ETFs. And Jon, I guess I want to ping this question over to you first. Obviously the non-farm payrolls number kind of weighing on markets today.
But it’s going to be a really noisy week next week with the financials. What’s the biggest story? Because it seemed like the Fed had already said regardless of what the number was going to be this week, as long as it had a plus in front of it, they were basically going to be tapering in November anyway.
JON MAIER: Yeah, no, I don’t think it’s that big of a story, quite honestly, Brian. I mean, the jobs report was a little disappointing. But the Fed was pretty explicit that they’re going to taper in November unless the jobs report was just very bad. And I don’t think it was as bad as people believe.
Leisure and hospitality and retail saw gains. And I think going forward, the fed will taper. The yield curve will steepen. We’re starting to see it steepen already. And that’s a positive for financials.
Banks are going to be making more money and actually providing more credit. And I think it’s a positive for the economy overall. And we’re building that into how we look at portfolios, having a higher exposure to financials, as well as financial technology, which is one of the ETFs that we have at Global X.
SEANA SMITH: Luke, what do you think? I guess, what’s your assessment of the number that we got today?
LUKE TILLEY: Yeah, there’s a lot of moving parts underneath it. But clearly, job growth took a hit from COVID and a little bit of a slowdown because of the Delta impact. And there’s also just a real problem with labor supply. You know, anybody who thought that there was going to be a rush back into the market when unemployment benefits ended on Labor Day is clearly disappointed by today’s report, which actually showed a reduction in labor force participation.
But we’ve got to remember, the BLS’s reference dates for these things are in the middle of the month. So it was September the 18th when they snapped the chalk line for these jobs. There wasn’t that much time for people to be moving back into the markets– into the labor market and looking for a job.
We do expect things to improve as we go forward. We’re actually, just right now, eight days away from snapping the chalk line for the next jobs report. The high-frequency data that we’re looking at is already showing a better report for next month. We think that’s what the Fed needs to see. And we think that that plays into about 500,000 jobs per month, on average, as we go forward from here. We’re still pretty optimistic, Seana.
SEANA SMITH: Well, Luke, when you take a look then at what we did get, I guess, what would you then attribute the slowing of the jobs recovery to? Is it all Delta to blame?
LUKE TILLEY: There’s been a broad-based slowdown across a lot of service sectors that had opened up and really had a spurt this past summer. But there’s a little bit of a slowdown because of low labor supply. There’s also one little bit of data minutia, if you’ll just allow me.
Well, there was a big drag coming from local government education, I think that’s been pointed out by a lot of people, and the drop in jobs there, because on non-seasonally adjusted basis, you usually get a lot of people returning to work and sort of the headline has been not that many people returned. When you look into the data a few months back, it’s actually that not that many school teachers left. Significantly less people left the public education sector in the summer, so there weren’t as many that needed to return.
And so, you know, it’s a little wonky and into the data. But basically, the seasonal adjustment pulled them back out. That’s the kind of thing that’s really going to solve itself out. It’s just data minutia as we go forward.
Fundamentally what we see are challenges with labor supply, because we’ve had a lot of retirement. We’ve had a lot of people who are still out because of COVID, because of childcare issues. And we expect all those things to improve as we go forward from here.
BRIAN CHEUNG: We love data minutia here on Yahoo Finance. I want to direct this question over to you, Dave. I just kind of want to ask in terms– or Jon– sorry– rather, I want to ask about the idea of the value trade, because we have the financials coming up next week, and we know that value has been doing very well over the last few weeks. So really, what is the expectation as we kick off this next quarter of earnings here with regards to whether or not that trade will continue for value trades like financials to really get a big boost into the end part of this year?
JON MAIER: Sure. Thanks, Brian. You know, we look forward to big banks reporting next week. And I expect financials to be a recipient, at least going forward, of tapering. You’re going to hear a lot of that discussion on the conference calls. I think they’ll have a decent quarter. But next quarter we think likely will be a very good quarter as the yield curve deepens.
I think one thing about financials that banks have the ability to put more money into the system to expand credit, expand credit beyond just very creditworthy borrowers, whether it be companies or individuals. So I think this is an overall positive for the economy, in general, if banks can more broadly lend out. And that’ll have more participation in the economy.
I also think that, you know, I mentioned it earlier, we’ll just get a little more specific, financial technology, financial technology has exposures like buy now, pay later, digital wallets, and cryptocurrencies, and mobile payments. And you’re seeing a massive adoption in the financial technology area. And that is helping the overall financial sector as well. So I am very bullish on financials.
SEANA SMITH: Luke, when you take a look at some of the other issues when we talk about the recovery here, supply chain issues, we were talking about that in the restaurant industry in the last hour, I guess, how significantly do you see that potentially holding back the recovery that we’re expecting to see over the next couple of months?
LUKE TILLEY: Yeah, we think it is going to be a bit of a drag. And again, going back to that idea, if there was an idea that there were just so many restaurant workers sitting at home and that they were going to rush back into the labor market and solve the issues, that’s clearly not going to happen. What we’ve had here, as there’s been such strong market returns, is a lot of retirement. It took six months last year for the S&P 500 to return to its pre-recession peak. 401(k)s are strong. They’ve continued to get stronger. And what we’ve seen is a surge in retirement.
That has completely turned on its head from 10 years ago. In the previous recovery, it took 5 and 1/2 years for the S&P 500 to return. So if you think about 10 years ago, there was a logjam with people not retiring at the top. Right now we have a vacuum at the top. People are retiring. You’ve got people being moved up into the organizations that they’re in.
And we have seen significant evidence of people being pulled out of leisure and hospitality and going and working as paralegals or working in some entry-level jobs in other sectors because there’s opportunity there, because there’s higher wages, because they’re tired of being on their feet. And so there are a lot of changes going on in the economy. It’s not just people who are out of work and are going to return to the previous sector they were in.
There’s an incredible amount of gyration going on and changes. Thankfully, the restaurant sector, service sector, basically all sectors have invested so heavily in tech, ordering food on your phone, on your iPad and scanning the QR code, that all sectors are in a position to be more productive going forward and actually don’t need as many employees as they did because their structure has changed so much, Seana.
BRIAN CHEUNG: Oh, Luke, I want to ask as a follow up, what do you see in wage growth? Because we saw wage growth tick up to really high levels. 4.6% is what I think it was year-over-year in the September report. Does that point to a possible inflationary spiral if you assume that–
LUKE TILLEY: Yeah.
BRIAN CHEUNG: –yeah– these businesses are going to be paying out more then they’re going have to raise prices on what they’re selling?
LUKE TILLEY: Yeah, it’s a great question, Brian. We did see it accelerate, and that’s from the previous month of being 4.0%. We’re seeing those wage gains. And a lot of that is composition effects. So different sectors of the market when there’s the job growth in lower-wage sectors or higher-wage sectors, it really messes up sort of that composition. So when we break it down and we look at individual sectors and high-wage jobs and low-wage jobs, most of the wage pressure is actually in those lower-wage jobs, leisure and hospitality and retail, those places where we do see a dearth of applicants. We don’t see that many people rushing back.
So that can be inflationary, but it really depends on the sector. At the middle-wage occupations and the high-wage occupations, we don’t see as much wage growth and wage pressure, but that’s yet. I mean, we haven’t seen it yet. As we look forward over 6 to 12 months, we do expect to see higher wage pressure that’s more broad-based.
And that’s one of the things that we think will contribute to some higher inflation as we go forward. But we don’t expect it to be a spiral. Clearly the Fed is trying to engineer some higher inflation. We want a little bit higher inflation. That’s what they’re going for. And it does play through to higher interest rates, the impacts on finance and bank stocks that you were just talking about, and the cyclical trade and the value trade.
SEANA SMITH: Luke Tilley of Wilmington Trust and Jon Maier of Global X ETFs, thanks to you both for joining us, and have a great weekend.