The Labor Market Is Starting to Crack. That’s Bad News for Stock Investors.

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Labor market - The Labor Market Is Starting to Crack. That’s Bad News for Stock Investors.

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The labor market is at an inflection point that could be hugely consequential to the economy… and to investor sentiment.

Job openings dropped recently to 8.06 million in April from 8.81 million in February, the lowest since February 2021. This is significant not only because it represents a sharp decrease in a relatively short period, but also because job openings tend to be a leading indicator. What does this mean?

What Low Job Openings Mean for the Labor Market

Historically, the number of job openings tends to mirror the inverse of the unemployment rate. Weak job openings mean higher unemployment. Strong job openings mean lower unemployment. As one goes down, the other goes up. The unemployment rate, which has already inched up from 3.4% a year ago to 3.9%, could see more increases if there is further job opening softness.

Now to be clear, I don’t think investors should be expecting sudden mass layoffs, but it does appear as though we are at the start of a further acceleration of unemployment. One reason for this is the impacts of the post-pandemic rate-hiking cycle. A second is that employers are working to replace employees with AI to increase their margins. One of the key reasons why we had wage inflation after Covid-19 was because it became increasingly difficult to find skilled labor. That dynamic seems to be fading with every passing day.

The Bottom Line

None of this should be surprising. I continue to emphasize that small-cap stocks are below their 2021 highs. Small-cap companies represent the small business portion of the stock market. To me, the fact that these stocks can’t sustain any upward momentum is a sign that unemployment is pervasive in this key part of the economy.

When you combine the performance of small-cap stocks with the defensive posturing in consumer staples stocks, you can make the argument that the stock market has been discounting labor weakness now all year.

If my interpretation is right, investors should position themselves in defensive sectors of the stock market, high-quality bonds, and gold to play a decelerating economy that could translate into a more volatile stock market. Rising unemployment will start to eat into even the AI-driven market frenzy. It’s just a question of when.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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