Wall Street's misinterpretation of Friday's Employment Situation report caused a negative outlook for investors.

Wall Street's misinterpretation of Friday's Employment Situation report created a negative outlook for investors.

NYSE trader is shocked! (Photo by Drew Angerer/Getty Images)Getty Images
It's shocking to see how the NYSE trader is reacting to the news! It's clear that he's not happy with the situation.

Wall Street's logic is frightful - or laughable. Here's the line of reasoning that caused the stock market to fall on Friday (10/8): The stock market fell on Friday (10/8) due to Wall Street's logic. This logic is frightful or laughable, depending on how you look at it.

  • The latest BLS Employment Situation report (focusing on the All Employees/Total Nonfarm data) showed slowing growth for September, but it was still "too good." The data indicates that the economy is continuing to grow at a healthy pace, despite some headwinds. This is good news for workers and businesses alike.
  • With the lower unemployment rate, it is confirmed that over-goodness exists in the economy. This is good news for everyone, as it means more opportunities and stability.
  • The Federal Reserve's decision to raise interest rates further indicates that it is not ready to "pivot" and instead is committed to its current monetary policy. This is good news for those who believe that the Fed should continue to pursue a hawkish stance on interest rates.
  • While higher interest rates may cause some short-term discomfort, they are ultimately necessary to prevent inflation and ensure a healthy economy. In the long run, higher interest rates will help to keep the economy strong and prevent a recession.
  • It is clear that the recession will have a negative impact on employment growth and increase unemployment. However, it is important to remember that recessions are also opportunities. They provide a chance for businesses to restructure and for workers to reevaluate their career choices.

The humorous side of all this is not just the circular reasoning. It's the first line. "Too good" results from saying growth was above Wall Street expectations. Except the Street's guesses are scattered. According to Econoday, they ranged from 220 to 350 thousand. Interestingly, that put the reported number of 288 thousand right into the middle of the range, equally better and worse than expected - or right on.

The key takeaway from this report is that the rate of increase in new cases is slowing down. This is evident from the graph, which shows a steady decline in the rate of increase since August. This is good news and suggests that the efforts to control the spread of the virus are working.

Monthly change in employees - seasonally adjustedJohn Tobey (FRB of St Louis - FRED)
John Tobey of the Federal Reserve Bank of St. Louis says that the monthly change in employees, seasonally adjusted, is a key economic indicator. He notes that it is closely watched by businesses and government officials alike.

One More Point to Note: Seasonal Adjustment

The Bureau of Labor Statistics (BLS) uses seasonal adjustments to create a "seasonally-adjusted" number that can be compared with other months. The following graph shows the actual counts of employment changes, along with the seasonal adjustments. Note especially the September to November holiday buildup, followed by the large post-holiday reduction in January.

Monthly change in employees - SA and NSAJohn Tobey (FRB of St Louis - FRED)
The Federal Reserve Bank of St. Louis released data showing that the number of employees in the U.S. increased by 0.4 percent in March. This is good news for the economy, as more people are working and contributing to growth.

Importantly, the seasonal adjustment numbers are not perfect. They don't account fully for monthly variations, so seasonally-adjusted numbers should always be viewed as approximations. While seasonal adjustments are essential for understanding long-term trends, it's important to remember that they are not perfect. They don't account for all monthly variations, so it's always best to view seasonally-adjusted numbers as approximations.

Looking at the numbers for September, it's clear that there has been a year-to-year decrease in actual numbers. Last year's increase was 704 thousand, while this year's was only 431 thousand. This shows that we need to be careful when making comparisons between years, as there can be significant changes that can impact the results.

Employment changes are small, but important.

Looking at the pandemic statistics, it is clear that the 431 thousand increase in employed people in September was only a very small change in comparison to the total number of employed people in the US. In fact, this increase only equates to around 280 new employees for every 100,000 existing employees. However, it is still encouraging to see that the number of employed people is slowly but surely increasing, despite the challenging circumstances.

The better logic against the backdrop

The latest employment report isn't a scary surprise. Instead, it continues the slowing growth rate. A slower rate is healthy because it is helping correct the unhealthy mismatch of job openings to possible employees that was sparking wage inflation - just what the Fed is attempting to tame. This is good news for the economy as a whole. A slower growth rate is healthy and sustainable in the long term. It is also helpful in correcting the imbalances in the job market that were causing wages to inflate. The Fed is on the right track in trying to tame these inflationary pressures.

The recent rise in mortgage rates is not cause for alarm, as it is still within the range of what is considered a "normal" rate. A 6+% mortgage is still affordable for many people, and higher rates have actually been seen in previous years without any negative impacts on the housing market. The main reason for the voiced concern is the speed of the rise, but it is important to remember that the recent ultra-low mortgage rates were not sustainable in the long term anyway.

As short-term business loan rates continue to rise, companies are beginning to reverse their strategy from last year of increasing inventory levels to protect against shortages and higher costs. Instead, they are now focusing on getting their inventory-to-sales ratios back to a more reasonable level. This shift could help to ease the burden on businesses and help them to avoid any potential financial difficulties in the future.

The recent rise in interest rates is having the desired effect of reducing inflation, and is returning rates to a more normal level. This is good news for the economy, as it shows that the capital markets are functioning properly.

Wall Street's Biggest Fear

It's no secret that low interest rates have been a boon for Wall Street. With investors searching for yield, Wall Street has been able to peddle all sorts of risky products with high potential returns. But now that interest rates are starting to normalize, it's unclear how long this party will last.

As we all know, examples are a great way to learn. And when it comes to learning about something new, four good examples can go a long way.

  1. There are a lot of things to like about Special Purpose Acquisition Companies (SPACs). For one, they offer a way to get your money back with interest if the company is unsuccessful in its acquisition efforts. Additionally, SPACs are often expert-driven, meaning that the people behind them have a lot of experience and knowledge in the acquisition process. However, there are also some drawbacks to consider.
  2. As the IPO market continues to heat up, established but over-leveraged companies are increasingly looking to go public. Weber and Dole are two recent examples of this trend.
  3. This is an exciting story about biotech IPOs with large, negative cash flows. Many of these IPOs have tanked, but there are still plenty of opportunities for investors to get involved in this growing industry.
  4. The use of leverage in financial products has led to increased risks and higher returns for investors. However, this practice has also contributed to market instability and volatility. We believe that more regulation is needed to protect investors from these risks.

Wall Street Wants What It Can't Get: Yesterday

We're all guilty of looking for a quick fix from time to time. Whether it's in our personal lives or in the business world, we're always on the lookout for a shortcut. But as the old saying goes, there's no such thing as a free lunch. The same is true when it comes to investing. So-called "dead cat bounces" are often just a temporary reprieve from a downward trend. And using debt to artificially boost returns is a risky strategy that can quickly lead to trouble. Of course, that doesn't stop people from trying. We see it time and time again, especially in the world of finance. But eventually, the truth always comes out.

As a result of the passive, buy-all approach of index funds, returns could be weakened. Therefore, a better strategy is likely to be investing in actively managed funds - ones where the fund managers and analysts are established experts. They will be focused solely on the future, not on reimagining the good ol' days.