Christmas came early on Wall Street.
Friday’s jobs report gave investors everything they wanted: evidence the U.S. labor market isn’t slowing, but growing stronger, while providing workers with healthy, but not inflationary wage gains. These data, combined with increasingly positive noises coming from both China and the U.S. that some sort of trade deal will soon be reached, sent the Dow Jones Industrial Average
S&P 500 index
and Nasdaq Composite Index
to new highs Monday.
But these data points have overshadowed other, less promising, statistics that have some analysts worried that Wall Street is getting ahead of itself, and that significant risks to the economy and the stock market remain.
“Right now, markets are strong, and momentum is clearly higher, as the market is seizing on any positive trade utterance or economic data point and ignoring virtually all bad news,” wrote Tom Essaye, president of the Sevens Report, in a Monday note to clients.
He pointed to falling Treasury yields (the yield on the 10-year U.S. Treasury note
fell 6.2 basis points during the past week), declining corporate earnings and weak copper prices as “measures of future economic growth [which] are still flashing warning signs.”
Copper prices are viewed as a good, though not infallible, leading indicator of future economic growth, given its importance in basic industries and for electricity transmission. It’s 0.9% one-week decline dovetails with sobering data on the global manufacturing sector, including a below-consensus print from the Institute for Supply Management on U.S. manufacturing that the market brushed off last week.
Instead, investors are looking on the bright side of things. The rolling three-month average in monthly job gains has increased to 176,000 in September, from 142,000 in April, while wage growth has slowed to 3% a year, down from 3.4% in February. This paints the picture of a labor market that is providing plenty of employment and wage growth to keep consumers spending, but one that doesn’t threaten to trigger the sort of inflation that might cause the Federal Reserve to raise interest rates.
This picture of a thriving U.S. consumer was corroborated by third-quarter GDP data, released last week, which showed the U.S. economy growing at respectable 1.9% clip, supported by 2.9% growth in consumer spending.
But these data tell investors what they already knew — that the U.S. economy is being powered by an unusually strong U.S. consumer whose confidence has been buoyed by an historically strong labor market. The question remains: how long can American shoppers shoulder the economy and stock market, given that during the third quarter business investment shark by 1.3%?
Torsten Slok, chief economist at Deutsche Bank Securities wrote in a Monday note that he is worried about the continued sluggishness in business investment and a concurrent collapse in confidence among chief executives.
”As long as these trends are with us, we will continue to worry about downside risks to the outlook, and the key question for investors is if the ‘phase one’ trade deal is enough to reverse the slowdown,” Slok wrote.
He went on to explain that GDP is derived by the combination of a growing labor force, businesses investing in new capital and productivity growth that results from new technology or the invention and spread of new business processes. If business investment continues to shrink, “it will ultimately have a negative impact” on the labor market, he wrote.
This is especially true, Slok argued, when wages are rising, thus creating a situation where employees are expensive relative to capital equipment.