Facts vs Feelings with Ryan Detrick & Sonu Varghese
This podcast takes a deep dive into the market-moving events to cut through the noise and help you identify what really matters. Facts vs Feelings is hosted by Chief Market Strategist, Ryan Detrick and VP, Global Macro Strategist, Sonu Varghese, and is a product of the Carson Investment Research Team.
The information included herein is for informational purposes and is intended for use by advisors only, and should not be copied, reproduced, or re-distributed without the consent of CWM, LLC. Carson Partners offers investment advisory services through CWM, LLC, an SEC Registered Investment Advisor. Carson Coaching and CWM, LLC are separate but affiliated companies and wholly-owned subsidiaries of Carson Group Holdings, LLC. Carson Coaching does not provide advisory services.
Facts vs Feelings with Ryan Detrick & Sonu Varghese
Why Stocks Just Bottomed (Ep. 59)
Use Left/Right to seek, Home/End to jump to start or end. Hold shift to jump forward or backward.
A number of factors and causing the stock market to continue to experience high volatility, causing uncertainty for investors.
With October’s correction, are there signs of a market bottom? A potential rally?
In the latest episode of Facts vs Feelings, Carsons' Chief Market Strategist, Ryan Detrick & VP, Global Macro Strategist, Sonu Varghese explain why stocks may have just bottomed, despite the market correction and bearish sentiment. Ryan and Sonu discuss their predictions about the S&P 500's gain after the midterm elections, as well as the key factors affecting the labor market, and the significance and economic impact of rising productivity.
Ryan and Sonu discuss:
- The recent market rally, including the Fed's influence, positive job numbers, and historical data on stock market corrections
- The historical trend of the S&P 500 being up on average 14.1% one year after midterm elections
- How the Fed's rate hikes in the past affected the economy and how the current pause in rate hikes is different
- An analysis of the recent jobs report, its impact on interest rates and stock market, and the potential impact of strikes on the numbers
- The Sahm Rule and its potential implications for a recession
- An analysis of layoffs and their impact on the overall job market stability
- The significance of productivity and labor force growth in driving real economic growth
- And more!
Connect with Ryan Detrick:
Connect with Sonu Varghese:
Welcome to the Facts versus Feelings Podcast. I'm your host, Ryan Dietrich. And I'm joined by my co-host, Sonu Vargis. Cutting through the noise in 30 minutes each week with Ryan Dietrich, Chief Market Strategist, and Sonu Vargis, VP Global Macro Strategist. Taking out the boring and helping investors focus on what really matters. A quick note before we start the show. Investment advisory services offered through DWM LLC, an SEC Registered Investment Advisor. Carson Partners, the division of DWMLLC, is a nationwide partnership of advisors. Hi everyone, welcome to the 59th episode of Carson's Facts versus Feelings. Ryan and Sony. Sono we're going to title this one, Why Stocks Just Bottomed. Now we probably just upset a lot of people with that uh with that comment, but we're gonna we're gonna dive in anyway. Now, Sony, you know, I'm getting older, so can I do a little rant for you as we before we even start? So my daughter is 16 today. We're recording this November 7th. Happy birthday to her. She's 16 today. And uh right before this, she did, by the way, she did have school today. It's like perfect, perfect scenario because it's you know it's election day in Ohio. I guess you don't have to go to school on election day. So it all worked out that she has no school on her birthday, which is pretty cool. You think about it. She loves Starbucks. She loves Starbucks probably more than she loves me, I'll be very honest. And she wanted Starbucks, so I took her to Starbucks. I never really go inside, I usually just let her go in. I actually went in with her today. I'll just say this much. Okay, yeah, the food's fine. It is a zoo in there. I can't do it. I get so nervous. It's like chaos. They I got like what I get, a chocolate croissant. I thought it sounded kind of good. It's in a bag. They hand me the bag. It's got all this chocolate smear on the outside of the bag. I touch it, I put it on my shirt. I'm like, you gotta be kidding me. I said, I can't do it. I'm getting too old. I cannot go inside of a Starbucks. And airports are okay, but boy, our local Starbucks is just crazy. So, anyways, we're gonna have a hibachi go ahead.
SPEAKER_00Storm, no lesson of the day, right? If ever you're hanging out with Ryan, don't hang a chocolate croissant with smears all over it.
SPEAKER_02Well, that's a that's a good lesson. That is that's a good that's a good good rule. Good rule, I guess, is what I should say. But yeah, we're gonna go out to a hibachi place tonight. And she doesn't even listen, she doesn't even listen to this podcast. If she does, hey, you're gonna get a car soon, okay? But she didn't even listen to it, so it doesn't matter. So yeah, we've we got a car. We ordered it on our on Car Max, right? It it's like I'm following it, it's it's hoping it'd be here today. It's not, it's like up in up in Chicago. Sony, can you just get it for me and drive it in today, maybe later today? But she's gonna get a car soon.
SPEAKER_01So maybe what it is. I would be so honored.
SPEAKER_02Yeah, I'd be so honored if she actually listens to my podcast. I gave away she's having a car, but trust me, she's not going to hear this because I don't even think she she doesn't care. I have a podcast. But anyway, that's okay.
SPEAKER_00So I have a question on that for you. Are prices coming down?
SPEAKER_02No, I mean, yeah, as of this morning, I saw the Mannheim used car index at prices down 2.2% in October, but boy, it sure didn't feel like it to me. That's a good question there. Anyway, all right. So sort of let's let's kind of dive in here. I mean, we're gonna have a fun one. We're gonna try to keep it about 30, 35 minutes or so. Um, we're gonna talk about why stocks likely just bottomed. We're gonna take a look at what Jerome Powell had to say last week. Did he say anything really different? I don't know, but the market took it that way because the market took it dovish. Um, you've got some really good data. You want to take a look at the unemployment rate, last week's uh payrolls number, which uh again sparked a rally on Friday at least. And we're gonna end it with a really interesting discussion. One you're gonna hear a lot from us probably going forward is a uh a look at productivity. So so let's start again with that uh stocks bottomed. I mean, a week ago, right now, we're doing the podcast and we were in a market correction. We actually titled it Houston. We have correction, talking about stocks down 10%. Late October, historically over the top bearishness. We saw a lot of different things. We're gonna talk about what sparked the rally really late in the week. Again, the Fed and the jobs number, but the bottom line, all five days last week were higher. As the time you and I are talking, the NASDAQ has a shot at being up eight days in a row. The SP's been up six days in a row. Uh, lots of different ways to look at it, but I want to point out one thing called the Zwig Breath Thrust. And I we talked about this actually last April. Keep this real high level and simple. Yeah, I'm gonna do a blog on a Carsong Group.com in a couple days. So by the time you listen to this, you can probably see it. But simply put, it looks at how many stocks are going up versus down on a 10-day basis. What you're looking for is really super duper oversold, okay? Oversold. And in 10 days, you get really super duper overbought. That's the easiest way to put it. We've had like 16 of them since World War II. One year later, SP has been higher every single time. I think it's like 22% average return. So again, it's just one data point I'm aware, but when you layer on over all the over the top negative sentiment, you layer the fact that, hey, October, late October, I mean, the average year bottoms on October 27th. This year bottomed on October 27th. And we just can't birthday 28th, it's 28th, which was a Saturday this year, so I did not get it, which is historically the best day of the year. But anyway, all these different things layered on top of the fact that listen, stocks just rallied big time. You got these breath thrusts taking over, you got all this negative sediment. My take is you know, you can't make guarantees in this industry, but I just think we had another classic correction in the fall, late October rally, and here comes the end of the year rally. You want to dive into anything I just talked about there?
SPEAKER_00I mean, it smells like 2022, 20 last year, right? Yeah. I mean, you know, it feels like we were here a year, you know, a year ago, literally. By the way, is this number? What number of podcasts is it? 60, 15, 59, 15.
SPEAKER_0259, I think I said that. And if I forgot, apologies. But I was thinking 16 in my head with my daughter's 16th birthday, but it's our 59th. So we've been doing these over a year now. Um, and we just what did we just oh, how did we charting?
SPEAKER_00We're charting. Yes, is that the word?
SPEAKER_02Yeah, uh chartable, according to chartable research, which is a podcast um data source. Our podcast, this podcast you're listening to was just ranked for the first time. We are ranked number 170 out of all financial podcasts according to chartable data. We are ranked number 170. There are some really big podcasts ranked um behind us, which was really shocking. So they must not go by total downloads, there must be other things that they look at, which is really cool. But we've done 59 of these, and our goal now is to become a top 100 financial podcast. So keep listening. Um, and we'll keep we'll keep doing them. Um, what were we talking about? Sono? I just went on a sidetrack. Oh, market, market rally, you end of your rally. What do you want to talk about?
SPEAKER_00Yeah, no, yeah, it kind of feels like last year, right? I mean, we had the same situation in a sense, like sentiment was really poor, markets had just come off a massive drawdown. What uh the SP was down 25, 20.
SPEAKER_0125, yeah.
SPEAKER_0025, something like that.
SPEAKER_01Yep.
SPEAKER_00And you know, now the key difference, right? Which is and of course, now is what November is usually when a lot of shops, investment shops, come out of their outlook. And last year, everyone, almost everyone, not everybody, almost everyone is saying that we've been in a recession, things are really dire. Sentiment is poor. It kind of feels like things are improving a lot up until July, and now everything's back to where it was last year. There are key differences, which I'll get to. I mean, Fed and all of that. I mean, I mean the outlook is very different, but from our perspective. But feels like sentiment-wise, you're in the same place.
SPEAKER_02Yeah, not not that not that different. And again, this was about a 10% correction versus a 25% bear market. Yet, if you look at put-to-call ratios, some flow data, some sentiment polls, you're seeing as much fear now, in fact, in some cases, more than we did in a 25% bear market, which is interesting. But here's here's what I thought's interesting. So, today, again, is election day. Um, so go out and vote. Or actually, by the time you heard this, it's not going to matter if you didn't vote or not, but hopefully you went out and voted. But this is you know, just from stats and figures and things we talk about. We talked about this on this very podcast 52 weeks ago. That if you look at the day of the midterm elections and go out one year since World War II, stocks have never been lower. That's the SP 500. The SP 500 one year after that is up on average 14.1 percent. So any of this might blow your mind. One year since the midterms in 2022, take a wild guess. The SP 500 is up 14.1%. The exact average that we've seen. And again, I mean, when we mentioned that and talked about it, talk about why we thought, but I mean, literally in the second week of November, we were out there saying that's the lows. I don't think, I mean, people thought we were crazy. I remember going out on the road, doing it, talking at conferences. People thought we were crazy to say those were the lows. And you know, it is what it is. Um, but you look now. Remember a year ago, we were hearing about the yield curves inverted, LEIs were negative, M2, something called Quad 4, whoever knows what that is. I mean, there are different things that people were looking at that we just didn't believe. Yeah, we just didn't, we're like, no, that's it's not true. There is no recession coming, things aren't great, but we're not just falling off a cliff. And here we are a year later, people were getting worried again, and we're still in that same camp, right?
SPEAKER_00No, exactly. Uh and in fact, a big, let's say, drag on the economy last year at this time was the Fed. What the Fed was raising rates like no tomorrow. They're raising rates by 0.75 percentage points every meeting from July all the way through November. In fact, a year ago, I think it was their last 0.75% point rate hike, right? Yeah, they're not doing that right now. They're not they just paused, they've paused since July.
SPEAKER_02Yeah, that's a big difference. Well, it is. I mean, yeah, you hike 11 times up almost 500 basis points, and that'll um you know upset some of the Apple card a little bit, but now we don't have that. We don't have that at all. Um, you know, I mean, just some things again. We mentioned this last week, but maybe just a couple more contextual things to be aware of. November again, when when uh October's down, like it just was. And again, we're on, you know, I want to be clear about something. We were on record a month ago saying we thought October, the early lows. Remember the October, I forget exactly third, fourth, fifth, around the. We thought those were gonna be the lows. We thought those are the lows. Market bounce, and we are aware it rolled back over. So a little egg on our face, you could say, potentially, because we thought those were the lows. But here's what I want to point out that the terrible war that happened in the Middle East sure didn't help things uh from that point of view. But also something I think it's important for people to realize there's something called a bang and a whimper. That's what we look at from a technical point of view. Bang means boom, the big drop. Wimper is you kind of go up a little bit and then you come back down and maybe test it, maybe just break it. But here's what you're looking for. There were more 52-week lows on the NYSE, on the SP 500, on the Russell 3000 back in early October than when we just broke those lows, you know, about a week ago or a week and a half ago or so. Um, so more lows, even though less lows, even though price made a new low. That is what you tend to see at major lows. Look at 87, 87 crash in October. Most people think 87 crash October. You know, stocks bottomed in December of 87. Right. But way more stocks made 52-week lows back in October than they did December. And I can list a lot more of these examples. I mean, October 2002, March 2003 is another one, and there's there's more, believe me, even a year ago. I mean, a year ago we had it. So you'd see these banging whimpers. We've we're seeing it again, and it's just something to really be aware of that there's some technical improvement under the surface. And if all you looked at was market in a correction, and we broke the early October lows this time a week and a half ago, uh, you might have well, you'd miss. You'd be you'd be missing some of the information that's out there if you don't peel back that onion all the way. You want to uh add anything there?
SPEAKER_00No, I love that term bang and a whimper. Basically, it it seems like there's no follow-through, right? I mean, everyone's you know, done with the selling, and then there's no more people left to sell or be really pessimistic.
SPEAKER_02And let's be honest, from a sentiment point of view, it is pretty demoralizing when you think the early October lows were it, and then you break them. And I mean, we've been bullish, and that was demoralizing. Oh, here we go. We made new lows again. What's going on? And we laid out why we were so optimistic, but I don't care who you are, it still was a gut punch, you know. And then then you have a week like last week with the SP gained six percent, small caps gain even more. Um, you know, all the stuff that happened, um, stuff that happened happened. But I mean, we're gonna move forward. So anything else you want to talk about? Um, yeah, I guess some of this is so connected, you know, it's so connected to what we're about to talk about.
SPEAKER_00I'm still amazed by that number, but that average number since uh last midterm midterm election, 14.1 percent. I mean, one of my favorite charts of amongst the multiple charts you put out is the one that shows that no year is average. But you know, here we are. We're bang on the average. That's amazing.
SPEAKER_02No, you're right. Maybe I'll point it out again because I know we have a lot of financial advisors that listen to this podcast, and you know, the average year gain is about nine percent for the SP, but you go back since 1950, so over 70 years, only four times out of the over 70 years has the SP closed between eight and 10%. So you call that about average. Only four times. So average isn't average. Literally, you know, a week or so ago when we're flirting with about an 8% gain for the year, I got to thinking and said, man, either we're maybe gonna drop a whole bunch or we're gonna see an end of year rally, because it wouldn't be normal if stocks were up about nine or 10% for the year. You get those swings. Unfortunately, you know, as the time you and I are speaking, you know, about 15% total return on the SP, give or take. Um, and and we're so optimistic, there's still more common. All right, Sonu, so let's kind of move forward because again, a lot of this stuff's connected. My question was gonna be what could spark the end of year rally? And I think maybe we're getting a sniff of it. It potentially the Fed turning a little bit more dovish. We had an interest rate decision last week, widely expected. The Fed is holding pattern or holding pat last week, but now it sure seems like the markets catch going with you and I have been talking about that hey, inflation's coming back, economy's strong, they don't need to keep hiking. They might be even can cut sometime late next year. We'll get into that or middle of next year. Why did the market react so positively to the Fed this time? Because I'll be honest, I didn't think it was that different than what he said six weeks ago.
SPEAKER_00What'd you think? I didn't either. It was mostly during the press conference, right? Yeah. And look, you know, they had their meeting last week and they didn't rock the boat, they kept rates steady. Literally everything that was in the FOMC's the open market committee, their statement was, you know, that it wasn't very different from what we heard before. Powell didn't say much uh anything different either in his official statement, right? Just before the press conference. But then, you know, during the QA, uh, you know, uh reporter asked him, Look, you all have penciled in one more rate hike in 2023. What do you do with that? Right? Is that coming? And then Powell went on to say he kind of downplayed that fact, right? He said, you know what? For practical purpose, he basically said, ignore those projections, right? He said the the dot plot, their projections for what comes in the future, its efficacy drops in three months, right? And he said the FOMC members can change their views in three months, right? So the markets are already pricing in no more hikes, right? Markets didn't think they didn't believe the Fed, so to speak. And Powell literally didn't do anything to shift that expectation. He had every opportunity to do it, right? They definitely follow market expectations. We know that they don't ignore it. But look, I think their view is they've done enough. Now they want to wait and watch. Risks, risks are balanced. It's not like last year. Last year, the risk was mostly one-sided. The risk was that they wouldn't do enough to curb inflation. Now there's a risk that they do too much, they could over tighten. They're very aware of that. I think that's huge. That's positive.
SPEAKER_02Let me jump in there. Wouldn't it be something that the Fed, you know, made the wrong move or went too far one way or the other, given, of course, I'm joking there. I mean, I I you know, I I saw some things from our friends uh fun strat, right? Tom Lee, friend of the show, obviously been on the show before. I'm pretty sure Tom said along the lines of used cars equated for about two-thirds of the huge spike in um inflation that we saw, you know, middle of 2001, 2002. Um, yet this morning the Manheim used car index did come in down 2.2%. It's negative year over year, Sonu. 14 months in a row. If used cars were one of the bigger reasons we had issues with inflation, and that was a big reason the Fed was so aggressive, let's be honest. There are other reasons I get it, but used cars were a big chunk of that. I mean, used cars I think were up what 40% year over year at one point near the peak. I mean, that's that's incredible. Um now it's not a headwind anymore, right?
SPEAKER_00Yeah, no, look, look, I think what the Fed wants to see, and this is another important thing Powell mentioned, right? And this they've been saying for a while now. They've disconnected the labor market, what happens in the labor market and the economy, to be honest, from what happens inflation. Because what what's happened, right? Over the last year, GDP growth has accelerated. The economy is done really well, it's up 2.9% since you know uh Q3 of last year. Just last quarter, the economy, you know, economic growth was 5%, almost 5%, right? And the labor market is pretty strong. I mean, we'll talk about unemployment rate, it's a 3.9%. But you know, Powell said that's okay, right? We're not worried that that will lead to inflation because during this time during when all this has happened, inflation's gone down. Inflation's gone down from a peak of 9% to under 4%. That's huge, right? And then you look at core inflation, like you said, a big part of it is used car prices. That's still coming down. By the way, you know, we shouldn't completely ignore headline as well, because all of us, literally everyone listening to the podcast, you and I, you know, we experience headline inflation. We don't experience core inflation, right? I mean, the Fed focuses on core inflation because they think that's what's sticky, that's the trend. But, you know, gas prices are coming down. That's going to be huge. I mean, gas prices are three close to 390 a few months back. It's down to about 340 right now.
SPEAKER_02Uh so I've got CNBC on before we started this. I'm pretty sure I heard CNBC say, don't quote me here, I'm pretty sure I heard this. So the gasoline prices were like the lowest this year, right? It's like the lowest this year right now. It's the cheapest time to fill up your car. I know I filled my car up last week and it was one of the lowest numbers I remember in a long time. So again, those are just, you know, okay, there's an extra 20 bucks. I didn't have you know this time two months ago, give or take. So um more money for your daughter. I was thinking, what would I spend my 20 bucks on? I don't know. If I had 20 bucks and no one knew what I was gonna do, I'd probably get some bucks somewhere. I don't know. Star no, no, uh maybe not so much. Um, yeah, yeah. Speaking of that, I mean, yeah, Sono and I had fun in Chicago. We were in Chicago on um, well, you live there, so you're there more than I was. I flew in on Sunday. I I did an event on Monday this week with Name, the NAAIM, a really great organization. Had a lot of fun at that event getting to speak and meet met some really big time uh people in the industry. But Sona, you and I had uh had a nice dinner, watched my Cincinnati Bengals win a game uh as well on Sunday night football. And let me just tell you that the steakhouse we went to did not look like a recession was coming, did it?
SPEAKER_00No, and uh we did get a little bit of dessert too, which a little potato dessert.
SPEAKER_02You guys maybe you hit us up privately, a DM or something on X or whatever. We'll send you a picture. The desserts we did your kids eat it. We got two pieces of cake. If you've ever been to Gibson's Gibson's in Chicago, look at their desserts. It's unbelievable. It's unbelievable. Are your kids eating that for like the next month? I mean, that was a lot right after Halloween, too. Goodness gracious.
SPEAKER_00Lunch for me yesterday, lunch for me today, dessert for the kids yesterday, today.
SPEAKER_02You're doing the chocolate or the carrot cake. This is only between Soto and I now, but uh which one are you both? That chocolate was so good. Oh my goodness. Anyway, all right.
SPEAKER_00That's insane. I think that was bigger than my kid's birthday cake.
SPEAKER_02No, one piece, yeah. Go to Gibbs in Chicago if you want, but again, get one piece of cake, it feeds six people. We are dead serious. Um, anyway. All right, so Soto, that's probably enough about the Fed. I mean, the Fed is likely done. We've been talking about let's talk about the jobs number because that was the other big thing that came out on Friday, and it kind of runs runs along with the Fed here. What I heard was a jobs number was a little bit weak. We heard, you know, if you look at the household employment survey, it's showing problems. I think I heard somewhere that the jobs number's been revised lower, maybe it's nine or ten months in a row. People were poking a lot of holes in that number. See, the economy's really dropping. And if you look at yields, yields really dropped on that. I mean, but the market rallied, let's be very clear. So sometimes that's what I care about more than anything is how the market reacts to it. Um, what was your take on that jobs number? Was it really as bad as people made it sound? No. Short answer. I figured you'd say that now.
SPEAKER_00Sorry, it's collecting my thoughts here, but uh thinking you're thinking of lunch. I know I am too.
SPEAKER_02Yeah.
SPEAKER_00The cake. The cake sitting upstairs in my refrigerator. That's what I'm thinking about. Look, the labor market is slowing down, right? And it was a disappointing report, but what yeah, you spoke about you talk talk about markets going up, right? We've been in this dynamic since July, uh, probably through October, till this rate labor market report, till this payroll report came out. That good news is bad news, right? Good news, good economic data news, interest rates go up, stocks don't like that, stocks go down, right? That's literally a dynamic we've had. Now we got some disappointing economic data, and it was disappointing by no, I'm I don't mean to minimize it, right? But then yields, interest rates went down, and stocks like that, right? So there is this bit of yin and yang that's going on, right? Which is not to say we want to see look, we've you and I have talked about this. Good news is good news, bad news is bad news. Now I just don't think this payroll report is really bad news, right? I mean, look, like I said, the labor market is slowing down. All recessions are preceded by slowdowns. But here's the important thing, right? All slowdowns don't have to lead to recessions, right? Job growth in October came in at 150,000, expectations are 180. But look, the UAW strike, which has ended, by the way, that pull payrolls down in October by 30,000. We also have the actor strike that's keeping payrolls depressed by about 16,000 or something, and that's why you talk about revisions. And you never want to take the one-month number at face value, but you can take a three-month average. So the three-month average is at 204,000. And seven months ago, we were at 300,000 up until March. So things have slowed, right? But 200,000 is still very strong. Before the pandemic, we were averaging 180,000, Ryan. To keep up with population growth, we need about 100 to 125,000 jobs a month, right? So 150,000 is not bad. 200,000, I would say, is very good.
SPEAKER_02So let me ask this. And if the number came in at 150, expected 180, I mean, how maybe you mentioned it, but I want to dive in again. How many jobs likely were impacted by the UAW strikes? What would that if that if we never had a strike, what would that number maybe come in at, you think?
SPEAKER_00Uh the UAW strike specifically pulled payrolls down by about 33. Okay. So we would have been about 180 or so. Okay.
SPEAKER_02So let's go to the next step then. So things are slowing. No, let me rephrase this. Things are normalizing. Maybe slowing a little bit, but more normalizing is one of our big themes. You've written and talked about this a lot. Really great stuff you've done on that. Just the idea that we're more normalizing here. Hey, you know, we're still making 200,000 jobs. I know last month wasn't 200,000, but overall we're averaging. What did you say we're averaging? Um I wrote it down. 204. 204 the last three months. So we think that can continue. Let me ask you though, unemployment rate. This is something that has clearly been out there. Unemployment rate, I've got it written here. I know you know it. It ticked up to 309. 309. We're down. 3.9. 3.9. 3.9 versus 3.8. It's been ticking higher. Now there's something called the PSM rule, and I'll let you explain it, but a lot of people are throwing out the PSM rule, S-A-H-M. You might hear this a lot going forward. And it it potentially, if this were to trigger, this rule were to trigger, it would mean not that we're going into recession, that we're in a recession. Like it's happening right now, which would be quite interesting with all the other economic data that is not saying a recession. But you know, it hadn't triggered yet, I want to be clear. But people are saying, hey, be on the lookout. It might happen soon. You want to talk a little bit about that? Because I know you've got some really good thoughts.
SPEAKER_00Yeah, so the unemployment rate, anytime the unemployment rate, I don't want to sugarcoat this in any way. It's concerning if it goes up, right? And it's moved from a low of 3.4 to 3.9%, right? Now let's see, let's put that in perspective. And let's talk about the Psalm rule, right? So it was developed by this former Fed economist, Claudia Sam. Uh, she's fantastic, by the way. And what she developed is look, it's an empirical observation, right? It's an observation, it's not a like, it's not like like gravity is a rule, right?
SPEAKER_02I mean, you know, if I draw you and I getting cake for dessert is a rule.
SPEAKER_00You know, there are certain things you live by. Yeah, yeah. This is an empirical observation, and kudos to her. This is what she developed, right? What she said is that if the three-month moving average of unemployment rises by 0.5% points from its prior 12-month low, then the economy is in a recession. Right now, Ryan, the three-month average of unemployment, the unemployment rate is 3.83%. The prior low over the last 12 months is 3.5. So the sum rule indicator, so to speak, is 0.33%, right? And she says if it's at 0.5% or above, it's triggered. Right now it's not triggered. But if it is above 0.5%, that means we are in the middle of a recession or the recession has started, right? That's what it is. So I know there's a lot of panic. So basically, I think to you know, here's some more perspective. For the SAM rule to trigger, we'd have to see the unemployment tick up to 4% and stay there for November, December, and January. Okay. Right? That's the earliest probably it would trigger. Unless obviously it could also trigger if the unemployment jumps from 3.9 to 4.3% next month, but I don't think that's likely to happen, right? So just to put some context around the unemployment, the PSM rule, right? But let's talk about the unemployment rate real quick, right? Now, the other part, and I was looking at this, you know, you know, I sent a daily note out to our advisors, and I was I was trying to figure out, okay, why is the unemployment rate rising, right? And especially when other parts of the literally the payroll report, right? Well, like claims, right?
SPEAKER_02Claims aren't really soaring. I mean they've ticked up a little bit, right? But they're not soaring higher.
SPEAKER_00Yeah, they're around 215,000, which is really low, right?
SPEAKER_02Yeah, they were under 200,000, not that long ago, but it's all, you know, you get these bounces. Yeah.
SPEAKER_00And here's the thing over the last year, he's Powell's not talked about this as much, but he's basically said, look, he's worried about inflation, but he's looked at it through the lens of the labor market. He said, you know, the labor market is very unbalanced, right? You have a lot of demand, but you don't have a lot of supply. Here's the thing we've seen a lot of supply coming into the labor market. Labor force growth. So the labor force, right? Uh, the number of people basically looking for work, that's literally how it's defined, plus all the people working, right? That's grown by 3.1 million over the last year, Ryan. And it's grown six million over the last two years. That is a massive jump in labor supply. It's growing at a pace of about just under 2% year over year. Now, obviously, what does that mean, right? Let's compare it to before the pandemic. Between 2017 and 2019, the labor force grew by 5 million. Over the last two years, we've done 6 million. Before the pandemic, three years before 2017, 18, and 19, the labor force is growing at 1% annualized growth. Right now, we are printing close to 2%, right? So that's almost two times the pre-pandemic base. So what's happening? A lot of this is immigration too. Immigration is higher, so that's why you know we're seeing that big jump. And a lot of people are coming into the labor force. That's a good thing, right? Because a lot of workers coming off the sidelines, they're looking for work. That tends to happen in strong labor markets. I mean, you wouldn't look for work if you thought the labor market is weak, right? That's what happens during recession. The labor force tends to shrink, right? Because people just leave the labor force. So I think that's some and a lot of people are coming in, but hiring is normalizing, right? A lot of employers hired a lot of people over the last couple of years. They're like, you know what? Now we just want to let let's make that work, right? Let's not go out and hire like crazy. So a lot of people are unemployed.
SPEAKER_02Now, good points there. And we talked about this before. We we our our economy created nearly five million jobs. I think we were there, then maybe some of the revisions, but we're right about five million jobs created last year. We we're gonna be somewhere between two and a half and three million this year, give or take, depending on where things go. Um, bottom line is you just don't have recessions, right? When you're doing that. Now, one thing, I mean, we we need to wrap this up here in a couple minutes, Sonu, but you did some really interesting work on layoffs also. You looked at layoffs, but let's be honest, if the economy was spiraling out of control, employees, I'm sorry, employers were worried about where things were going, layoffs would be soaring. I mean, remember earlier this year we had some big tech layoffs, remember some of the big all the Apple, Google, Microsoft, all the all the big names laid some people off, and everyone got really worried. We said then, you know, yeah, we're watching it. Maybe it's more tech specific or that area specific because they grew so much during the pandemic that sadly they were just trimming some of the fat. And and looking back, that was exactly what happened. What are layoffs looking like now? I don't think we've seen big surges, right?
SPEAKER_00No, actually layoffs are running really low. It's about one and a half million people. By the way, a lot of people get laid off every month, right? So this just gets to something Sam Rowe talked about when we were when he was on the podcast.
SPEAKER_02So I've been I've been hey, I've been laid off twice, and there weren't there weren't recessions. There weren't recessions, right? It's unfortunate. It happens, it happens, right?
SPEAKER_00Right. So when you talk about payroll growth, it's a number of people getting jobs minus the people leaving and laid off, right? Like separations basically. So layoffs are running at 1.5 million, as I mentioned. Before the pandemic, Ryan, it was running at 1.8 million. But keep in mind we have a bigger population, bigger labor force now. So as a percent of employment, the layoff rate, right? Number of people laid off by divided by the number of people working, that layoff rate is at 1%. Before the pandemic, it was running at 1.2, 1.3%, right? Just some perspective for you. By the way, the unemployment rate, you know, like yes, it's risen, and that's not, you know, you don't want to see that, right? Sure. Since the end of 2022, I was just looking at it. The unemployment rate has gone up from 3.5 to 3.9%, right? But you know, I I like to, you and I have talked about this. I like to look at the prime age employment population ratio, right? That's because that's sort of controls for demographics and labor force participation rate. It's literally the opposite of the unemployment rate, right? Except it doesn't have several definitional issues. That's at 80.6%, which matches the pre-pandemic peak peak, right? It's down a little bit, it's down from 80.8%, but not too concerning. Since the end of last year, so I just said the unemployment rate went up, but the prime age employment population ratio has gone up from 80.1 to 80.6 percent. That's a good thing, right? So again, that's lots. That's a lot of stuff going on here.
SPEAKER_02A lot going on there, but that that's that's that's great, great way to look at it. It's not just so simple. I mean, you know, we've heard oh, people aren't saving anymore because saving rates are lower. Uh they're they're strapped because of credit card debt. And then you look at money markets just soaring with six trillion dollars. It's like, hey, listen, I don't know, is that considered a savings account or not? But people are still have some cash sitting there. And again, this is a whole nother can of worms, but that's really interesting when you look at the unemployment rate versus um the prime population and and and prime workers uh that are out there, participation rates, what I'm trying to say there. Um, good stuff there, Sony. So the final a lot of peas all of a sudden, we're gonna end with one more productivity. Yeah, we're gonna we're gonna talk a lot about this going forward. So I think we're just gonna start to lay the groundwork by the time everyone's listening to this podcast. You can go to CarsongGroup.com and uh click on insights and get to our financial uh investment blog, and there should be a blog up on on um productivity. But Sonu, I think this is really interesting. I think maybe the first time we've talked about this, or at least really going to dive in for our listeners. But you've got some really unique takes that productivity hasn't been great for a while, but it's starting to get better. We got a really strong productivity print last quarter and I think annualized 4% the last two quarters. So productivity is starting to come back. If we get better productivity into next year, you know, kind of what does that mean for the economy, for inflation, for wages, uh, for this bull market to keep going? How does it all hinge on productivity, so to speak?
SPEAKER_00It's so important. It's probably the along with labor force growth, right? Yeah, the most important thing is productivity because real like economic growth is basically the sum of productivity plus late labor force growth. That's basically what it is. We just talked about labor force growth. That's positive. That's people are coming back in, right? Productivity is the other piece of it. It rose 4.7% Q3, and that comes on top of Q the second quarter is 3.6%, as you mentioned. Productivity over the last two quarters running about 4% annualized, right? But that took it above the 2010 to 2019 trend, right? Right now, since 2020, productivity is running about 1.4% annualized, uh, but between 2010 and 2019, it was running at 1.2%. So it doesn't look too different, but it's slightly higher. But it hides a lot of things, right? So you take 2022, 2020 to 2023, right? So initially productivity jumped in the second quarter of 2020. And you're like, wait a minute.
SPEAKER_02I wonder why. I wonder why. Because we all were, if you had a job, you were literally working three times as hard. So you had to be more productive. You wanted to keep your job. That's the that's a summary, right?
SPEAKER_00Literally, and that happens during recessions and immediate recoveries, right? Uh, so output starts to rise, but hours work remains low because a lot of people are out of their jobs, and even in 2020, Q2, second quarter of 2009, deep recession productivity rose nine percent. But these are all like our friends at Employ America, you know, Scondamer likes to say, these are empty calorie gains, right? It's not like the productive capacity of the economy has increased, right?
SPEAKER_02Is the chocolate cake empty calories? Is that is that they didn't when I went home after that dinner, I just laid on my bed and I actually fell asleep during the third quarter of the Bengals game because I ate so much food I couldn't even stay awake. So they might have been empty calories or full calories, but it did put me to sleep during the third quarter of the Sunday night game. Sorry, Sona, to jump in. I just wanted to point out. No, no, yeah, empty calories, empty calorie gains, right?
SPEAKER_00And that's literally what happened in 2020, 2021. Remember, we the economy recovered to its pre-pandemic pace by middle of 2021, and we we did that with 8 million fewer workers. Right, right. Right? So workers are really getting squeezed, but that kind of productivity increase only lasts so long. People started getting hired again, right? And then, you know, that they have to be trained, they have to be retrained. You had a lot of churn in the labor market, a lot of workers moving around. This is not a period when productivity goes up, it goes down, right? And that's what we saw in 2022. Productivity started to fall, right? And by the way, this also relates to what happened in the 1970s, right? You had demographics, you had a lot of baby boomers coming into the workforce, and as they got hired, you basically got low productivity, right? So that was the option in the 1970s. You got either low productivity or mass unemployment, and we got you know a lot of people employed, but you got low productivity, and that's one reason we had inflation, right? But what's happened, and I'll come to that piece of it, but what's happened over the last two quarters, the good part is we've had a massive increase, like I said, 4% increase in productivity over two quarters. That's the largest two-quarter increase we've seen since the late 90s. Wow, outside of these recessionary periods. The recessionary period productivity gains are artificial, right?
SPEAKER_02So during the good calorie times is what we're saying during the calorie times.
SPEAKER_00Right. And and why must you know why is productivity increasing, right? Businesses have started making investments, including labor, right? Labor is business's biggest investment. They hired a lot of people 2021 to 2022. That's bearing fruit. That tends to happen during a tight labor market, right? Which is what happened in the late 90s. Higher wage growth means firms are more incentivized, right, to make productivity enhancements. They organize work more efficiently, there's buy more tech, all of that. Workers are also incentivized to be more productive, right? So you can and it also forces less productive firms, like if you have strong wage growth, right? You know, some firms are like, oh, we cannot pay that, and they may go out of business, but those may be less productive for firms. So as the less productive firms go out of business, it can boost overall productivity in the economy.
SPEAKER_02Yeah, I love I remember you you sent this note to our Carson partners the other day, and I thought that was really interesting. Because if everybody else is productive and you're not, you're probably gonna go out of business. And that is that's not good for that particular situation, but for the overall economy, for more productive companies and employees and employers to take over, that's uh that's impressive. So again, we don't want to give go ahead, go ahead.
SPEAKER_00I'll I'll do a couple of minutes more just to connect why this is such a game changer for the Fed and really the Fed, right? And in because it ties to inflation, right? Because wage growth, if you think of a strong wage growth, wage growth is actually productivity plus inflation plus the change in labor share, right? How much of total income is you know a worker stacking versus you know businesses, right? That's it's the opposite of profit margins. So you can have faster wage growth because of faster productivity or higher inflation, or an increase in labor share of income or lower profit margins, right? Or some combination. Now, what happened in the 70s is I said productivity was low. Wage growth was running about 9% annualized pace. Just think about that. Wage growth was really hot in the 70s. That didn't translate to productivity increases. Instead, businesses just passed on price increases, and that's why we got inflation about more than 8% during that decade, right? 73 to 82. 90 uh take the period from 96 to 2004, wage growth is running hot, four to five percent. But inflation, Ryan, averaged is two percent, just above two percent. So you got real income gains, right? And that's because productivity surged to above three percent a year, and you had a tight labor market during this time. So there's this feedback loop between productivity policy and tight labor markets. So, you know, you get strong productivity growth, you get low inflation. That can lead to the Fed saying, you know what? Maybe we don't have to keep rates high. We don't have to keep interest rates high. That can lead to more investment, it could lead to lower unemployment, faster wage growth, and even more productivity growth. And that could signal to the central bank they can drop rates further, right?
SPEAKER_02So it's a really interesting conversation. Uh, we're definitely gonna dive more into this going forward. Just maybe to wrap it up. 94, the Fed hiked rates aggressively. February uh 95 was like their last hike, then the market sniffed out. The Fed was gonna start cutting in late 95, which is exactly what happened. If you look back in your history books, 95 was a really bullish year, but so was 96, 97, 98, 99. We we were aware, and again, that was one of the last times we had really strong productivity on good calories, as as we're gonna call it. Calories. Yeah, so definitely really interesting conversation. I think we're kind of at the end of the road here, Sonu. Any um any final comments from you, and then I'll bring us home.
SPEAKER_00No, I I think I'm looking forward to the next two months. I mean, you know, November, December for markets, and and really next year. I mean, between productivity, all of that, I think that's a lot to look forward to.
SPEAKER_02Uh well, I love it. That's great. Let's hope there is. And I'll just say this it's uh really warm right now in Ohio, and it was warm in Chicago. And it was warm the week before Halloween, yet Halloween night was like freezing all around the country. I don't know. Maybe we need to be more productive next year and just pick a warmer day for Halloween, so we're not out there freezing when you do Halloween. It's just funny, like every day was nice except for Halloween the last two weeks. Hopefully, wherever you are, you're enjoying a nice fall day. Uh, thanks again for making us a number 170 ranked uh financial podcast according to the chartables data. Um, we really appreciate that on the Facts Versus Feelings podcast. We'll keep doing them if you keep listening to them, and uh that's a lot of fun. So here's to a productive, like the way I did that, Sono, here's to a productive rest of the week, and hopefully a real productive next year as well, which could help bring a lot of things together to keep this economic calorie gains. Good calorie gains, keep this economic recovery going, keep this likely bull market going, keep earnings uh continuing to grow and all in all. We're still pretty optimistic that things are going to look a lot better into the future. So, with that, we will see everybody next week. Take care. Thank you. Information provided on Fax versus Feeling for some of our geeks and Ryan Git are for general information only and are not intended to provide specific advice or recommendations for any individual. The statements and opinions of Joe Gats may not be reflective of CWM LLC or its ability. Past performance is no guarantee of future results. All agencies are unmanaged and may not be invested directly. Investing involves risk, possible loss of principal. No strategy assures success or protects against loss. To determine what may be appropriate for you, consult with your attorney, accountant, financial, or tax advisor prior to investing. Guests on facts versus feelings are not affiliated with CWMLLC.
People on this episode
Podcasts we love
Check out these other fine podcasts recommended by us, not an algorithm.