Alan's Alert 6-30-2021

 

Job seekers are continuing to find employment, especially in the sectors of the economy that were hardest hit by the government shutdowns.  ADP’s National Employment Report was posted this morning and it showed an increase of 692k jobs from May to June.  624k of these jobs were attributed to the service sector.  Leisure and hospitality picked up the most workers at 332k, followed by education/healthcare at 123k.

Here’s the bigger picture:

Employment increased 0.6% month-over-month.  With May’s increase of 0.7%.  We are picking up jobs at a 7-8% annual basis.  At this pace, we’ll be back to the pre-shutdown employment around mid-January 2022.  With more states dropping the federal unemployment bonus, I expect this could happen sooner if it weren’t for…the massive amount of boomers leaving the workforce.  This graph from the Fed doesn’t do it justice:

According to the latest census data, the US has 328k+ people.  96.5M are 55 and older and their current participation rate is 38.4%.  Prior to the shutdowns, boomers were 40.3% of the workforce.  

 

I put together the spreadsheet below to highlight how significant this is:

As you can see, we have lost 1.8M of those 55 years of age and older from the workforce.  I expect many will not return.  As this age group moves into retirement mode, expect them to spend less as they live off their accumulated savings and investment holdings, putting downward pressure on inflation.  There will be a struggle between the spending of the boomers dropping off and the spending of the 25-54 age group increasing.  The upcoming times for this group could be particularly difficult if another market crash erodes the value of their 401ks or rampant inflation destroys their savings. 

 

But let’s look on the bright side, 692k jobs beat the consensus estimate of 600k.

OPEC+ meets tomorrow and the oil futures (/CL) price has been swinging wildly from $72.82 up to $74.12 in early trading.  Investors are weighing the odds of OPEC+ extending the oil supply cuts.  Russia has already signaled that they would like to increase production between 500k to 1M barrels per day.  We’ve seen how tight this market is when there were rumors that Iran was going to be bringing their production back online.  Prior to the shutdowns, OPEC went to war with US shale.  They pumped oil at an extreme pace to make US shale producers unprofitable and to hoard market share.  As OPEC has slowly allowed the price to rise, I expect they will be keen to keep a close eye on those shale producers.  If there is a signal that the cuts won’t be extended, expect the price to drop.  This will be a buying opportunity. 

 

It pains me to have to talk about this but I think it could have an impact on future market reactions.  The stock market discounts future events into the present.  Since the government has made serious in-roads into the economy by shutting down businesses due to virus infections, it’s important to keep an eye out for the possibility that it may happen again.  This is something that I don’t want to fathom.  However, my job as an investor is not to determine whether a certain government policy is good or bad, it is simply to understand what reaction the market would have to such a policy and front-run it.  The news media has really ramped up the rhetoric that this delta variant is something to be worried about.  For those who understand how variants work, this is nothing to be concerned about.  As viruses mutate, they will always mutate to being more infectious.  Thankfully, they never become more deadly and in fact, become less so.  While the infection rate will increase, hospitalizations and deaths will drop off.  I believe we are already starting to see this.  Unfortunately, there are 24 letters in the Greek alphabet giving the infotainment industry lots of fodder for more variants.  Thankfully, they’ve already wasted 4 Greek letters, let’s hope they get through the next 20 sooner rather than later.