In terms of the headline numbers, the labor market continues to prove resilient.
According to the Bureau of Labor Statistics, the The US economy added 199,000 jobs in November in the face of high interest rates. The unemployment rate also fell back to record lows, falling to 3.7% from 3.9% in October.
But if you look at some employment data beyond the monthly nonfarm payrolls figure, the labor market outlook becomes a little less rosy, he says. Jon Wolfenbargerthe founder of the investment newsletter site BullAndBearProfits.com.
In a recent note, Wolfenbarger shared five indicators that the labor market continues to weaken despite the positive numbers.
First, there is the fact that the three-month moving average of the unemployment rate continues to trend upwards to 0.3 percentage points. Known as the Sahm Rule, named after former Federal Reserve economist Claudia Sahm, when this average reaches 0.5 percentage points, it typically indicates that a recession has arrived.
Wolfenbarger noted that at the beginning of previous recessions, the moving average is usually below current levels.
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Then there is the temporary employment growth, which has fallen to negative levels seen at the beginning of the 2001 and 2008 recessions.
"Temporary employment is an important indicator of employment because it is easier to fire temporary employees than full-time employees," Wolfenbarger said in the note.
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But temporary employees aren't the only ones feeling the pain. Permanent job losses have also increased by more than 20% year over year, levels only seen during the last three recessions.
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The year-over-year percentage change in the number of jobs in the transportation industry is also flirting with recessionary levels. The trucking industry is considered cyclical because it is a reflection of the overall demand for goods.
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And job openings continue to fall despite a rising stock market, suggesting investors are distanced from the broader economic picture.
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Wolfenbarger sees a significant recession ahead, citing the historical track record of the aforementioned indicators and others such as the Treasury yield curve and the Conference Board's Leading Economic Index.
As such, he believes the stock will fall substantially. He told Business Insider that the S&P 500 could fall as much as 61.8% when all is said and done, and that's because of where valuations are. He cites John Hussman's relationship between the market capitalization of all non-financial stocks and the total value added (essentially total income) of those stocks. The measure is still above dot-com bubble levels, implying negative returns for the S&P 500 over the next 12 years.
For the measure to drop back to levels where investors can expect 10% annualized returns over that time, the S&P 500 would have to fall to 1,650.
Hussman Funds
Wolfenbarger's views in context
How healthy the labor market really is depends on who you ask. Some people say Job growth is simply normalizing or cooling as the Federal Reserve slows inflation, and more dovish monetary policy in 2024 will solidify a soft landing outcome. In some of the indicators above, for example, it's important to remember that they are year-over-year measurements, and one could argue that the declines reflect continued normalization after the stimulus-driven pandemic surge.
On the other hand, those declines could be in their early stages as the cumulative effect of rate increases begins to manifest.
Anna Wong, chief U.S. economist at Bloomberg Economics, is an economist who believes the labor market will continue to weaken. She recently told Business Insider that November's jobs report was perhaps misleading because many of the jobs added were in health care and government, two sectors that are mostly immune to recessions anyway. Wong expects a recession to hit the U.S. economy imminently if it hasn't already started.
As for the direction of stocks, Wolfenbarger's view is an outlier. The average S&P 500 price target for 2024 among top Wall Street strategists is 5,000. That represents about a 6% increase from current levels just above 4,700.
And after the S&P 500's 23% rally so far this year, the bears are becoming increasingly extinct. Michael Kantrowitz, chief U.S. equity strategist at Piper Sandler and one of Wall Street's most bearish strategists over the past year, said Friday that he is more open than before to a constructive outlook for stocks.
"I'm not broadly optimistic, but I can see the scenario of stocks continuing to rise and expand with the big bad wolf back in his den (Powell)," Kantrowitz wrote in a note.
He continued: "This year I was very wrong about the absolute returns of stocks; I'm trying to keep an open mind, stick to the story and my framework, and be willing to swallow my ego and not continue to be stubborn. What What if? Does it take longer or not happen at all?"
But some bears hold firm, perhaps most notably the investing legend. Jeremy Granthamwho called the dot-com bubble and the 2008 crisis. He told Business Insider earlier this month that he thinks the stock could fall between 30% and 52%.
It is too early to tell what the fate of the US economy will be amid one of the most aggressive monetary policy tightening regimes in generations. If employment growth continues and the labor market stops cooling when the Federal Reserve cuts rates next year, investors could be in for another great year. But if the data tells a different story, stocks could face a bumpy road, as Wolfenbarger warns.
