If there's one thing we know about the U.S. equity markets over the past year, it's that they respond very well to government stimulus. There's no way that the S&P 500 should be up 31% in 2019, 18% in 2020 and another 20% so far in 2021 during a pandemic that shut down parts of the global economy for extended periods without the assistance of the government and central bank dumping trillions of dollars into the U.S. economy.
It's also a big part of the reason that the S&P 500 continues to push higher even though there are multiple signs that the recovery is slowing and the Fed is getting ready to begin pulling back its support. The central bank is doing it in the gentlest way possible and saying they still won't consider raising interest rates for at least another year. The Fed is clearly floating the balloon to see how the markets and people react, but there's no guarantee that the government won't make another snap decision at the first sign of weakness.
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That's why I think this week's announcement of a vaccine mandate could be really important.
The Fed has said repeatedly that it's using the health of the labor market as a measuring stick for how ready the U.S. economy is to being ready to stand on its own. The unemployment rate has dipped to 5.2%, which is good news, but that only tells part of the story. Labor force participation still isn't where it needs to be. Even after the immediate post-pandemic recovery, labor force participation is still nearly 2% below where it was before the pandemic began. The current level of 61.7% is also the lowest it's been since the 1970s (not counting the immediate aftermath of the pandemic shutdown).
The number of job openings, however, are about 4 million higher than they were before the pandemic.
The easy solution would be to simply say that people just need to get a job, but it's more complicated than that. The unemployment rate is based on the number of people either working or actively seeking employment. It doesn't count the number of people who consider themselves out of the workforce and not seeking a job.
The reason that the official unemployment rate is low and the number of job openings is high is because many people are out altogether. With the delta variant raging and the vast majority of available jobs being of the people-facing variety, many don't want to put themselves at risk to their health.
The other complicating factor as of this week is the new Biden administration vaccine mandate. We know that there is a large segment of the U.S. population that isn't vaccinated and doesn't want to be vaccinated. A quick trip down the social media rabbit hole shows a lot of people more than willing to give up their jobs before taking the vaccine. To be fair, we don't yet know how many people would follow through or if the number is significant enough to cause a stir in the labor market, but there is a real risk that the jobs market is about to take a turn for the worse.
So let's go through the possible path of future events.
We know that the August non-farm payroll report came in far weaker than expected, so the Fed may already be on its heels with its plans to taper asset purchases later this year. An exit from the workforce of a number of unvaccinated people would make that jobs added number in future look weaker and potentially even turn negative. A continued weak labor market could result in the Fed deciding to delay its tapering plans until 2022.
Looser financial conditions for longer equals a justification for investors to keep buying stocks.
There are obviously a lot of possibilities. Workers could instead decide to hang on to their jobs but submit to weekly testing instead. Plus, the mandate would only apply to companies with 100+ employees, so it could be business as usual for small businesses. And it could be a relatively small number of people that actually quit their jobs.
There are a lot of ways that this could become not a big deal at all, but perception has been reality in these markets. Investors have already been exceedingly bullish throughout this recovery and willing to buy virtually any dip (remember, the S&P 500 hasn't seen a 5% pullback since last November). This could potentially be the ammunition that fuels another run for stocks and I think it will happen to some degree.
Which areas could benefit the most?
I think growth is a natural landing spot for investors, so tech and communication services could do well. Small-caps have a fair amount of catching up to do and could be positioned to outperform. I wouldn't be too keen on cyclicals here though. They've tended to do well only where there are firm signs that the economy is improving and we don't have that here.