The November employment report, delayed over a week due to the federal government shutdown, reveals a labor market that is stalling. With just 64,000 jobs added and the unemployment rate ticking up to 4.6%, this report shows signs that the economy may be getting bumpier.
For context, the U.S. needs roughly 100,000-150,000 jobs per month to absorb new entrants to the workforce. Falling short of that threshold means labor market conditions are actually loosening and will pressure the unemployment rate higher.
For equity markets, weakening labor market data is a double-edged sword. On one hand, it supports the case for continued Fed rate cuts, which is generally positive for valuations. On the other hand, if the labor market weakens too much, it threatens consumer spending, which drives 70% of the U.S. economy.
November CPI: Inflation at 2.7%
The November CPI report shows inflation continuing to cool, with headline CPI falling to 2.7% year-over-year from 3.0% in September, while core inflation held at 2.6%. The breakdown shows food up 2.6% (with groceries at just 1.9%), energy up 4.2% (driven by utility bills rather than gasoline), and shelter remaining the stubborn component at 3.0%. Services inflation continues running hotter than goods, but the overall trajectory is moving in the right direction.
For reference, the rate of change for prices is declining but still rising. The graphic below puts into perspective how much prices have risen since COVID. If we set a CPI price index at 100, you can see consumer prices are up 25% since 2020!
We may see various sectors begin to deflate like eggs and dairy but this index will continue rising until we have a recession which is characterized by prices declining.
The S&P 500
Stocks have been in a consolidation period for 10-12 weeks and the price action has been ugly with many 2-way reversals. This pattern is reminiscent of last year where the S&P traded sideways for 12 weeks before correcting into the April low. If the bulls breakout higher above $6975 then we should have several weeks of upside into the new year. Either way, we should get an answer soon on the direction of the next big move in equities.
One more thing, the S&P is trading at a forward multiple of 25x which is above the 20 year average of 16.26 which would imply weaker returns in the stock market in the coming years. Will profit takers drive the tape or will we get another high into 2026?
Next weekend is Christmas so I will not be publishing over the holidays. So, Merry Christmas and Happy Holidays!
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President, Kisco Capital
