Nonfarm Payrolls May 2019

Our scorecard for the American labor market is as follows: We remain at the lowest unemployment rate in 49 years and U-6 ticked down 0.2% to 7.1%. Bravo! Curb your enthusiasm because that is essentially where the good news stops in this month’s report. The US only added 75,000 jobs in May. A soft reading from ADP on Wednesday presaged today’s official report from the Bureau of Labor Statistics. Our own figures suggest rising risks in the labor market. Wage inflation remains tame, running at an annualized rate of 3.1%. The labor participation rate and employment to population ratio were unchanged MoM at 62.8% and 60.6% respectively. In and of itself, this report is certainly weak but not a calamity. After all, we have steady hand (#sarcasm) Jay Powell at the helm to guide our monetary policy through thick and thin.


The world is slowing… in economic terms at least. The US economy has been resilient thus far, but can the trajectory of growth be maintained? It’s very difficult to say. Using history as a guide, it is unlikely, but we are certainly in unusual times. Things change quickly and today’s use of “twitter policy” is both unprecedented and unpredictable. This level of unpredictability is only augmented by the unusual use of tariffs to ply certain economic, ideological, and now social outcomes. To be sure, the tariff net is widening in tandem with the range of possible market outcomes.  


A possible parallel historically speaking dates back to Colonial Times. In our own history, we can make use of several Acts passed under Prime Minister Greenville in the 1760’s. Britain and the colonists had recently emerged from a conflict with England’s nemesis, France, and several Indian tribes that had allied themselves with the French. The war was fought on the American frontier and lasted seven years. Costs ran high and the British government found themselves in the highly unusual position (#sarcasm) of needing funds after the Treaty of Paris had been signed. Enter George Greenville with his grand tax plan. The idea, of course, was to assist in raising revenue for expenses incurred to fight the French and Indian War. However, there was never a timeline established to remove the taxes once initiated. In fact, the case could be made that the primary objective of the Townshend Acts was to impose taxes with a “just cause” in order to maintain them indefinitely. Similar arguments have been heard lately regarding the Trump administration’s modern day use of tariffs, though I haven’t heard anyone invoke the Townshend Acts. Will the tariffs ever come off once they have been started? Time will tell.

Back to the market. May was the most challenging month for the S&P 500 year to date. The index shed nearly 200 points or 6.6% for the month to trade down to ~2750. Armed with more data in our models and with more than a few tweets thankfully behind us, we are revisiting our fair value estimate for the S&P 500. In December, we pegged fair value at 2800, and today, we are increasing our estimate to 2975. Critically, the TWP market outlook has not changed, but there is a clear SPX caveat as it relates to the highly unpredictable nature of US policy. Certain large tail risks remain as we approach the halfway point in 2019.         

Market Outlook: Bullish USD, Neutral Duration, Neutral Equities