Anybody who has ever worked in financial markets, and particularly anybody who has spent time in dealing rooms, is used to following news closely. The sense of anticipation on a trading desk as major releases approach is incomprehensible to those who have never witnessed it. Trading slows to a virtual standstill in the minutes before something like the U.S. Jobs Report is unveiled and everybody focuses intently on “the figures,” then once the numbers are known there is a sudden rush of activity. It is both scary and exhilarating to be a part of, but it completely distorts the importance of a single data point. In the real world, no one number is that significant.
It is not just traders who place oversized importance on news. Over the last twenty-four hours we have seen three major announcements, the ADP Private Sector Employment Report, the President’s decision on the Paris Accord and the aforementioned Jobs Report for May. To listen to the talking heads, you would think that all of these have tremendous importance for the long-term direction of the market. In reality, none of them matter when taken on their own.
The problem with the jobs numbers can easily be divined by looking at the reaction to yesterday’s report as compared to today’s. When ADP indicated a 235,000 increase in private sector jobs versus expectations of 185,000 and called it a “rip-roaring” jobs market, many pundits waxed lyrical about surging growth. Then this morning, when non-farm payrolls (NFP) of 138,000 fell woefully short of the 185,000 estimate, those same pundits are citing that as evidence that the wheels are falling off of the recovery. Some with a more political agenda are focusing on the drop in the headline unemployment rate to 4.3%, but when the downward revision to the last two months NFP totals are considered, it is hard to see this as anything but a bad report.
Those revisions also hint at another major problem with reacting to data releases. The initial read on any number is rarely correct. If you are really looking at the long-term implications for growth and the economy of employment numbers, you should really hold off until the actual number is known, generally a few months later. Or, better still, take the Yellen approach and pay attention only to the moving average derived from the numbers, rather than the individual monthly releases. The huge discrepancy this month, and for the last few months, between the official number and the ADP number should tell you all you need to know about using that report as an indicator for the Bureau of Labor Statistics (BLS) data.
It seems, then, that despite the intense focus by market professionals, investors should regard the monthly jobs report as somewhat of a non-event. It is useful when taken in a broader context, but the sensationalism that surrounds the stand-alone number is more about filling airtime than anything else. If that is true for the jobs report, it is even more so for those looking for a market reaction to the announcement that the U.S. will leave the Paris climate accord. Politically, that is a significant change, but from a marker perspective it will have no discernible impact.
President Trump may present it as a “job-saving” decision, but it will have no effect on the economy for a whole host of reasons. For starters, any jobs in fossil fuels that could be saved by withdrawing would probably be offset by losses in renewable energy industries, but neither of those things are likely to happen. The fact is that most restrictions on fossil fuels come at the state and local levels and the shift towards wind, solar and other renewable energy sources will continue regardless of what Washington says or does. If other nations were to react by discouraging investment in the U.S. or by applying “carbon tariffs” to American imports it could have an effect on the economy, but even that won’t happen immediately, if at all.
Overall, that touches on the real point here for investors. Traders who will hold a position for seconds or maybe minutes focus intently on data releases and news, as they create short-term volatility that is an opportunity to make money. The market focused media (and I include myself in that group) take their cue from those traders and obsess about the same things. Short-term fluctuations in markets, however, do not affect the economy. Long term trends in things like employment should be watched, but immediate reactions to news and data, especially news and reactions with a political slant, can and should be ignored.