Stocks got clobbered on Friday. The September jobs report came in hotter than expected. And the strong labor market dashed all hopes that the Fed will come to rescue struggling stocks with rate cuts.
The stage is now set for a pretty steep stock market crash over the next few weeks. But it’s also set for that crash to be the “grand finale” for the 2022 bear market – and for a durable market bottom to form in the very near future.
The investment implication? Brace for more near-term weakness, but get your shopping list out. The buying opportunity of the century is just around the corner.
Labor Market Begs, What Economic Slowdown?
Everyone’s talking about this big economic slowdown in the U.S. Apparently, no one told the labor market.
Last month, the U.S. economy added 263,000 jobs. Sure, that’s down from the 315,000 jobs created in August. But it was also above the 255,000 jobs expected by Wall Street. And in historical context, it’s a very solid number.
Typically, a healthy U.S. labor market is adding anywhere between 100,000 and 300,000 new jobs per month. The labor market is generally considered very healthy when it’s on the upper end of that range, adding more than 200,000 jobs a month.
That’s exactly where we are today.
Of course, in normal economic times, a strong jobs report is good news. But we aren’t in normal economic times. We’re in a strange period where good news is actually bad news. Indeed, good news means the Fed will hike interest rates. And higher interest rates are the bane of the stock market.
Indeed, Friday’s jobs report was so strong that it all but confirmed interest rates are going higher – WAY higher.
The Fed Won’t Quit Until People Lose Jobs
Here’s a simple truth about the Fed: It doesn’t cut rates until people lose jobs.
The central bank has a dual mandate. It wants to achieve price stability and full employment. Normally, the Fed raises rates to achieve price stability and cuts rates to achieve full employment.
It should be no surprise, then, that the Fed normally doesn’t enter a rate-cut cycle until the labor market crashes.
Over the past 50 years, the Fed has embarked upon nine major rate-cut cycles. All but one happened after the labor market crashed toward either adding less than 100,000 jobs per month OR negative monthly job growth.
The only time the Fed entered a rate-cut cycle without the labor market crashing was in 1984. And at that point in time, the Fed funds rate was more than double the inflation rate – hardly a parallel to the current situation.
In other words, the Fed doesn’t cut rates until people lose jobs, and people aren’t losing jobs right now. So, the Fed is very unlikely to even consider a rate cut at the moment.
However, that could change soon…
Labor Markets Can Crash Quickly
Ostensibly, the labor market looks really strong right now. The four-month moving average for job creation is about 350,000 new jobs per month. That’s about as good as it’s ever been.
But during times like these – recessionary periods defined by slowing growth, falling stocks, and washed-out consumer sentiment – the labor market tends to collapse quite quickly.
In early 2006, mid-2000, and mid-1995, the labor market went from adding about 300,000 new jobs per month to barely positive or negative growth within two to three months. In 1989, such a collapse took five months. In 1979, it only took three.
Historically speaking, then, it is very possible that the currently very-strong labor market flips to negative growth by early 2023.
Indeed, that actually looks very likely. The Conference Board’s Leading Economic Indicators index for the U.S. economy has crashed over the past few months. Historically, this index has led the U.S. labor market by about six months. Therefore, the index’s recent drop strongly implies we’re due for a big crash in the labor market over the next few months.
That’s bullish because again, we’re in this weird environment for stocks. Good news is bad news, and bad news is good news.
If the labor market collapses over the next few months, the Fed will suddenly and dramatically pause its rate-hiking campaign by December/January/February. If it does, it’ll be off to the races for the stock market.
The Final Word on the Labor Market
Everyone’s freaking out about the market right now – and rightfully so. Stocks are getting crushed this year, and it seems like every attempted rally falls short. Lots of investors feel hopeless.
I get it.
But let me ask you a question: If you could go back in time and buy stocks during a certain era, what era would you choose?
Would you choose the peak of the dot-com crash or late 2002, after stocks like Amazon (AMZN) dropped 90% and before they rallied more than 16,000%?
Would you choose the peak of the housing bubble or early 2009, after the 2008 financial crisis rippled through the markets and stocks like Netflix (NFLX) were trading for dirt-cheap?
Would you choose late 2019 after a massive market rally or March 2020, after the Covid-19 pandemic crushed stocks and before names like Block (SQ), Shopify (SHOP), and Roku (ROKU) soared hundreds of percent in a year?
Of course, the answers are obvious. You’d pick late 2002, early 2009, and early 2020.
Well, that’s what we have today in late 2022. I’m not saying this is the absolute bottom. It’s probably not. But what I am saying is that investors who buy high-quality growth stocks today will give themselves the opportunity to make 5X, 10X, 15X, maybe even 20X their money over the next several years.
So, we don’t need a time machine. The buying opportunity of the decade is upon us. Learn how to best capitalize on it.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.