As many folks know by now, this has been an unusual year for most asset prices. Despite the biggest economic shock in modern history, stock indices have hit fresh all-time highs in 2020, partially due to large government stimulus and a rapid expansion of the money supply.
The S&P 500 index, which the C Fund tracks, reached new all-time highs in recent weeks:
And the MSCI EAFE index, which the I Fund tracks, has had an even stronger run than the S&P 500 since the beginning of November. It has been a long-term under-performer and is not at all-time highs, but is at new highs for 2020:
The MSCI EAFE index has lower valuations than the S&P 500, and the dollar has weakened against major foreign currencies over the past month – this combination gave a jolt to international stocks.
While stock indices have reached fresh highs, economic indicators are more mixed. Some areas like consumer spending have bounced back to new all-time highs, while other areas, like jobs, have not.
Back in February, the United States had about 152 million non-farm payrolls. This swiftly fell to 130 million during the heart of the first pandemic wave and economic shutdowns, and rebounded back up to 142 million throughout the year so far.
However, as the chart shows, there hasn’t been a V-shaped recovery in jobs. It’s more like a backward square root sign, with fewer monthly net jobs created each month compared to the prior month. There was a sharp bounce-back in jobs after shutdowns ended, but that growth rate quickly rolled over in the autumn.
This past month created only 245,000 net jobs. It would take 420,000 net job additions per month to go from 142 million jobs to back to all-time highs of 152 million jobs in two years, by late 2022.
Alternatively, it would take 330,000 net job additions per month to get back to 152 million within three years, by late 2023.
If we look at the very long-term, we see a more concerning trend. The labor participation rate, which tracks the percentage of the adult population that is employed or seeking employment, has reached lows not seen since the 1970’s:
The normal unemployment rate only captures people who are actively searching for a job but haven’t yet found one. However, many people leave the workforce altogether, often due to a prolonged inability to find work.
Part of this is from demographics – as the population ages and a greater share of the population is over 65, the percent of adults who are working goes down. However, Japan’s median age is 10 years older than the United States, and the US labor force participation rate dipped below Japan’s this year for the first time in decades.