When it comes to the monthly jobs report, the number that everyone seems to have “anchored” on is 200,000.
What is anchoring, you ask?
As investors, we all tend to fixate on specific numbers. These numbers may change from time to time, but we fixate on them nonetheless. If you read any investment psychology book, you will see this phenomenon referred to as “anchoring.”
According to James Montier in his seminal book Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance, “anchoring is our tendency to grab hold of irrelevant and often subliminal inputs in the face of uncertainty.”
When the nonfarm payrolls number is above 200,000, it’s a sign that the economy is strong. Conversely, when the nonfarm payrolls number is below 200,000, it’s a sign that the economy is weak.
You can see how this has played out during the past 15 years in the jobs report chart below.
While there’s nothing magical about the specific number of 200,000, when nonfarm payrolls have been at or above 200,000, the economy and the stock market have performed well. But when the figure on the monthly jobs report dropped below 200,000, the economy and the stock market have suffered — like they did in 2008 and early 2009.
Unfortunately, nonfarm payrolls haven’t been as strong as they once were. During the past year, there have only been three months in which ADP measured jobs growth above 200,000.
This comes at a time when Wall Street is anticipating an interest-rate hike by the Federal Open Market Committee on Dec. 14. As you can see in the chart below, the CME Group FedWatch Tool has the odds of a rate hike at 74.2% (67.5 + 6.7 = 74.2).
This is concerning for investors because the economy is going to have to be that much stronger in a higher-interest-rate environment to continue producing the same revenue and earnings growth we have become accustomed to. If enough consumers aren’t getting good, high-paying jobs, there just isn’t going to be enough consumer demand to keep the U.S. economy — 70% of which is driven by consumers — growing.
So far, earnings have been good enough to maintain stability in the U.S. stock market, but we haven’t seen a resumption of a bullish uptrend.
This week, we’ve already seen ADP’s nonfarm payrolls data show 147,000 new jobs, missing expectations. The Bureau of Labor Statistics (BLS) is due on Friday, Nov. 4. And we expect to see continued volatility amid all this new data.
That said, if Friday’s numbers are strong, the U.S. stock market could rally. But if they continue to come in lower than expected, watch out for a potential pullback.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.