This month employment in the US is expected to overtake the 138m people in employment recorded in 2007, having dipped below 130m in late 2009. Unemployment has now fallen to 6.3%. Lower than 2009 but still 2 percentage points above 2007 levels.
This is clearly good news but hasn’t quite been good enough to scare bond investors (who worry of inflation) and equity investors (who worry of reduced monetary easing).
Why? The reason is the depressed participation rate, which measures the percentage of the population deemed available for work, which stands at 62.8%, compared to 67.3% in 2007.
But investors can be complacent choosing to look at past data without taking note of it’s future impact. As unemployment continues to fall given the economy’s greater appetite for jobs we are likely to see a combination of two things: higher wages being demanded (particularly given today’s record corporate profit margins) and therefore a greater incentive for those discouraged workers to return to employment, driving the participation rate back up again.
The irony being that, while this is great news for the economy, investors are likely to suffer considerable losses in equities and bonds as assets re-price the increased likelihood of inflation and a reduction in FED stimulus with a potential rise in interest rates.
Forget about bonds for the next decade but certain equities that benefit from global growth will offer substantial value once the shakeout is out if the way. Don’t play the musical chairs game. It will pay to be patient.