Last Friday we learned that the economy added 916,000 jobs in the month of March – the most since August of last year. We also learned that unemployment fell to 6.0%, which is the lowest level since the pandemic hit and is not terribly removed from the decades-low of 3.5% immediately prior to the crisis. Despite these encouraging headlines, though, the Fed is signaling no inclination to take its foot off the gas. The minutes from the Fed’s March meeting, as well as comments from Fed Governor Lael Brainard, made clear that the Fed will not be making any policy changes based on an improved outlook. Rather, the Fed will wait until it actually achieves outcomes consistent with its policy mandates. In other words, the labor market is still too weak and inflation is still too low.
The Fed is most concerned about the labor market. The first issue is that the number of unemployed, at 9.7 million in March and depicted by the orange bars in the table below, is still about 4 million higher than the low of 5.7 million in February, 2020. That is obviously a concern, but 4 million out of a population of 330 million is not a disaster, right? It gets worse. The Fed’s concerns are magnified by the fact that the size of the labor force, which represents the total of those employed and those who have actively looked for a job over the past 4 weeks, has dropped by about 4 million people over roughly the same time frame. The sum of 4 million more unemployed and 4 million leaving the labor force out of frustration means that we have 8 million fewer people are working now as compared to before COVID. That is still a lot of people, especially when we consider the fact that over 3 million of the unemployed have been out of work for 27 weeks or more. The Fed knows that the longer someone is out of work, the harder it is to maintain the skills necessary to find work.
The Fed continues to err on the side of conservatism. There is no doubt the economy and labor market are on a strong path to recovery. The stock market sniffed it out a long time ago, and the improvements have continued even in the face of second and third waves of infections. The question of whether we will make a full recovery from COVID-19 has been replaced by how long before the recovery is complete. The Fed’s challenge is to nurture the process to full recovery without either snuffing it out by disengaging too soon or causing unacceptable levels of inflation (to include asset bubbles). So far, so good. But the high level of complacency regarding the Fed’s tightwire act would argue for some caution.
Our game plan remains the same. Even though froth is evident in certain sectors and individual stocks, there remain opportunities for high-quality, blue-chip companies that will benefit from the ongoing economic revival. However, discipline will be required to maintain that quality bias in the year to come, and return expectations probably should be tempered somewhat.