Hello everyone and welcome to this episode of Ignition Time.
What is good for the American worker is clearly not good for Wall Street.
Welcome to this episode everyone.
My name is Dr. Nitin Chhoda with Ignition Time.
This right here is a little bit of information about me. You'll learn more about who I am,
what my journey has been like, and why you should listen to me.
This episode of Ignition Time is based
on this article on your screen from the New York Times.
A hot job market, which is an economic relief is a Wall Street worry.
Yes folks, as US unemployment rate falls, as more and more people get jobs,
as more and more people try to get higher wages, guess what?
That's something Wall Street doesn't like.
That's something the stock market doesn't like.
And I'll help you make sense of it in this episode of Ignition Time.
So what's going on?
The US unemployment rate is now at 3.6%, which is just a little bit above where it
was prior to the Pandemic, which by the way was a 50 year low.
On top of that, corporate profits went up
by 35% in 2021 and profit margins were at their widest since 1950.
However, the stock market has been hammered.
The S and P 500 and Nasdaq,
all the top tech stocks are declining.
Now, this may seem like a contradiction,
but according to this article, this is a historical pattern.
A hot labor market and a hot stock market, they don't mix.
In fact, they don't go hand in hand.
They are inversely proportional.
And I'll quote directly from this article and I'll help you make sense of it.
In fact, times of low unemployment are
correlated with somewhat subdued stock returns, which basically means as more
people get jobs, the stock market goes down while valuations trend higher
on average during periods of high unemployment.
In other words, when the American economy
is struggling, when everybody is in trouble,
the stock market tends to go up, which by the way, is what happened during COVID.
And analysts actually explain this phenomenon as a plain function
of the unemployment rate status as a lagging indicator.
In other words, the unemployment rate lets people know how the economy was faring
in the past, while the stock market is a reminder of where the economy is
actually heading in a very indirect manner.
So folks, what exactly is going on?
Well, let me help you make sense of this.
Here's a quote from Padhraic Garvey,
who is the head of research at ING, which is a global bank,
when unemployment is ultra low, the uppity times are behind us,
and when it's super high, there are good times ahead.
In other words, when unemployment is high,
and this by the way is what happened during the Pandemic,
the only place to go was up for the economy.
In other words, things were looking horrible.
Things were supposed to get better in the future.
And because the stock market reflects the future,
the stock market started to go up, but now unemployment is down
unfortunately, it can't go lower than 0% or a certain rate.
The average is right around 3%.
It really can't go lower than that because
there's only so many people who can take jobs.
You can't have an unemployment rate below
zero because the unemployment rate is already low.
The future cannot be better.
And by extension, the future may actually be worse.
And one of the reasons the future may
actually be worse is primarily because of inflation.
Because inflation is going up,
the Federal Reserve plans on raising rates pretty quickly.
And on top of that, we have high energy costs as a direct or
indirect result of the Russia Ukraine crisis.
And that, unfortunately, is a recipe for a recession.
And it's a recipe for a bad stock market, a collapsing stock market.
In fact, stocks actually outperform on average when unemployment is high.
Here's an image on your screen that shows you the returns on the SNP 500,
the Standard and Poor 500 index, which, by the way, was introduced in 1957.
And the average annual returns in the SNP
500 from 1948 to 2022 correlated with the rate of unemployment.
This is actually pretty astonishing when you look at it.
When the unemployment rate was high,
when it was greater than 9%, the returns from the stock market was substantial.
As the unemployment rate came down, the returns also came down for the most
part, which again, it kind of blows my mind when I look at this.
And hopefully you understand that when things are good for the American consumer,
when unemployment rate is low, Wall Street doesn't like it.
But when things are bad for the American consumer, guess what?
The Federal Reserve needs to then cut rates.
That's when Wall Street really likes it.
Because when money is cheap to borrow,
companies can grow faster and companies can even potentially hire more because
there's a lot of cheap money floating around and therefore,
companies can make more money, stocks can go up, and Wall Street loves it.
Let's take a look at what's happened in the past.
In 2007, for instance, unemployment sank as low as 4.4%,
but the annual return for the SNP 500 index was only 5.5%. Stocks actually
plunged during the financial crisis the next year and then again in 2009.
As the unemployment rate went
significantly higher to 10%, the index actually gained 26.5%.
So what's going on here, folks?
Well, when a recovery peaks,
all that happens is that all the excitement from investors actually
leads to additional risk taking by businesses.
And this essentially creates the seeds for the next recession.
Just as workers are benefiting from having
more jobs, higher paying jobs, and what happens is they get higher wages.
But these higher wages result in companies not having enough of a cash stockpile.
And this puts pressure on the profits
of companies, which in turn leads to Reduced Profits.
By the way, Google Just Announced Their Earnings And
Their Profits Actually Were Lower Than Expected.
And You Are Watching This Video On YouTube, Which Is Owned By Google.
And So When You Combine All Of These
Factors And Like I Said, You Have The Federal Reserve Raising
Interest Rates As A Direct Result Of Inflation.
What Happens Is A Strong Labor Market Can Lead To Higher Interest Rates,
And A Weak Labor Market With High Unemployment
Can Put Pressure On The Federal Reserve To Cut Rates.
And These Actions Affect Stock Valuations.
In Fact, As Interest Rates Go Up, People Are Like, Well,
I'm Getting The US Government To Pay Me A High Interest Rate.
Why Do I Need To Invest In Stocks?
And That's When Stocks Become Less Attractive.
And as I Mentioned Earlier This Year, In Addition To All Of These Macroeconomic
Forces Which Have Always Been In Place, The War In Ukraine Has Raised The Price Of
Energy, Has Slowed Global Growth, And It Has Added To Supply Chain Issues
Which Have Already Been Pushed To The Limit As A Direct Result Of The Pandemic.
What this Has Done Is This Has Actually Raised The Cost Of Raw Materials.
In Fact, Many Senior Executives At Morgan Stanley
Said That Strategists See Higher Wages Amid The Tightening Labor Market And
Related Labor Shortages, Posing A Risk To 2022 Corporate Profit Margins.
And they Said What Matters For Markets
Isn't Always The Same As What Matters For The Aggregate Economy.
So The Model Of The Story Here, Folks,
Is What's Good For The American Consumer Is Actually Bad For Wall Street.
And What's Bad For The American Consumer Tends To Be Good For Wall Street.
I Know This Isn't A Surprise, But I Think This Is The First Time We've
Seen Such A Direct Correlation With Data To Support This,
Which Again Goes Back To My Belief That The System Is Fundamentally Rigged For The
Rich And It Is Rigged Against The Average American.
Thank You So Much For Watching.
Please Click Like Please Click subscribe.
Please Enable notifications Once Again, My Name Is Dr.
Nathan Soda.
This Right Here Is A Little Bit Of Information About Me.
You'll Learn How I
Am Able To Live The American Dream, How I And I Was Once An Average American.
Now I Have The Fortune Of The Privilege Of Living The American Dream.
Please Check Out My Video.
Please Also Check Out My Twitter Channel.
I'm Ignition Underscore Time On Twitter.
Thank You So Much For Watching.
I Appreciate You.
I'm Looking Forward To Seeing You In The Next Episode Of Ignition Time.
Take Care. Bye.