Boring is Beautiful

Is this market crazy? Or just forgetful?

Last week’s employment report was lousy. When most predicted it would show a modest improvement, it turned out to be worse. A lot worse. Now we’re hearing all about the W-s, U-s and L-shaped recoveries that people were so worried during the winter of discontent last year.

Well, don’t get your knickers in a twist, as they say in Britain. The market, after a brief flurry down, seems to have recovered. And here’s why: when you look at the details of the report, most of the negative news is related to seasonal adjustment. And seasonal adjustment in September is a problem.

First, the timing of back-to-school adjustments is always difficult. Millions of teachers go back to work and tens of millions of students go back to school. Second, additional schooling in a recession is a highly rational choice. When there’s less demand for your skills, the opportunity-cost of upgrading your skills is low. So now is a great time to spend extra time in school, and lots of people are doing this. Third, we had an abnormally late Labor Day this year. This always messes up the seasonals in September and August.

Combined, these factors add up to mean that the unemployment report looked worse than it really was. I’m not saying that everything is sunny and roses. But neither does this report indicate that we’re on the brink of a new downturn.

The stock market has shown itself highly resilient in the face of what could be considered pretty bad news. We haven’t forgotten the lessons of last year. But inside the employment report, we see calm waters.

Douglas R. Tengdin, CFA
Chief Investment Officer
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