Strong and Resilient

The November jobs report provided a view of a U.S. labor market that remains relatively tight. Specifically, the 227,000 jobs created during the month was slightly higher than the consensus forecast of 220,000, presenting an upside surprise. Also noteworthy were the upward revisions to the September and October data.  Recall that the October data was very noisy with distortive impacts from labor strikes and the impact of two deadly hurricanes.

On the wage front, the report showed average hourly earnings rising 0.4% for the month, which was consistent with October and brought the year-over-year increase in wages to 4.0% — a still elevated pace and a continuance of the upward trend we have seen since this summer, when year-over-year average hourly earnings fell to a cycle low of 3.6%. For context, the annual average hourly earnings increase was trending in the low 3% range for several years leading up to the pandemic and peaked at 5.9% in March of 2022. Wages have been a key driver of services sector inflation and have proven stubborn — this data suggests it may remain so. At the same time, the unemployment rate rose to 4.2% from the prior month’s 4.1% reading, and labor force participation fell marginally, which may suggest some weakening conditions around the edges. In sum, this report will be interpreted as supporting the "soft landing" consensus economic forecast, where economic growth in the U.S. drifts slowly down to the longer-term trend level without any major dislocation in the labor market.

As we have noted many times before, the monthly jobs data gets a lot of attention, despite the fact that it is one of the most notoriously lagging indicators and subject to significant revision. We use a mosaic approach to assess broader labor market conditions, which includes more real-time data that can help paint a more complete picture of the landscape. The recent Job Openings and Labor Turnover Survey (JOLTS) and weekly jobless claims data indicate that the U.S. remains a great place to be if you have a job, and an increasingly challenging place to be if you don’t. The JOLTS data suggest that demand for labor is increasing, with the number of job openings rising to 7.7 million: This represents a gain for the month and a solid upside surprise following several successive months of declines. Also of note, the number of quits — which represent people voluntarily leaving their jobs — increased,  indicating growing confidence in the jobs market.

Are there any areas of concern? While the trend in weekly unemployment claims remains fairly stable, the level of continued claims has risen, driving the number of those unemployed for 15 weeks or longer to a cycle high of 2.9 million people. This is a rise of roughly 1 million from the post-COVID low and is something to watch. However, there are no obvious red flags right now across the U.S. labor market.

The selection of Scott Bessent as the administration’s Treasury Secretary was a turning point for the bond market, as investors had begun to worry about the impact of some of President-elect Trump’s policies on the U.S. debt and deficits. Specifically, the bond market was becoming even more concerned that some of the people being considered were less than market friendly and might subjugate the health of the U.S. balance sheet to other policy goals in the Trump agenda. Scott Bessent is considered to be a fiscal conservative in many ways, and a pro-market pick. This is obviously an incredibly prominent post that wields important influence over both economic and regulatory affairs, and the selection of someone who keenly understands all of the interplays is being interpreted very positively.

While the bond market did initially sell off just after the November election, we have seen interest rates decline demonstrably since the late November selection of Bessent. Both the 2- and 10-year Treasury rates have fallen roughly 25 basis points, or 0.25%, from their November peaks. While we anticipate that the 2-year yield will continue to drift lower as the market becomes more confident in the pace of 2025 rate cuts, we do anticipate that the 10-year Treasury yield may remain a bit rangebound from here as the U.S. growth outlook remains constructive.

The U.S. economy stands out for its robust post-pandemic recovery, with strong and resilient growth in spite of a sharp rise in borrowing costs. Inflation has fallen to a level that leaves real wage growth — which strips out the impact of inflation — positive. Moreover, consumers are consuming, and the jobs market remains relatively firm. U.S. financial markets continue to outperform their global counterparts, with much of that outperformance attributed to the heavy weighting of growth stocks — including technology and AI-adjacent stocks — in major U.S. benchmarks, and to U.S. corporate earnings growth. That said, even those areas of the U.S. market that are considered to be underperforming — specifically, small-cap stocks and value stocks — are besting both the MSCI EAFE developed ex U.S. and Emerging Market benchmarks. This has not gone unnoticed by investors, and we continue to see massive flows into U.S. equity markets, matching the elevated investor sentiment. 

However, the widening gap between the performance of U.S. equity markets and the rest of the world has resulted in a yawning gap in valuations across these markets, with both absolute and relative valuations in the U.S. skewing near their historical highs. While sentiment, positioning and  valuations should not be considered predictive market timing tools over the short term, they provide an opportunity to remind investors that global diversification remains an important risk management tool — particularly at such times of extremes.