October Jobs Report

Although coming in slightly below market expectations, the jobs report for October was one of the better reports we have seen this year.  Economists expected 175,000 jobs created versus the 161,000 actual number for the month. However, wages were expected to growth 0.3% for the month and these grew 0.4% with year-over-year growth of 2.8% in October, which is the highest figure since June 2009.  The unemployment rate fell to 4.9%, while the U.S. underemployment rate (which includes all workers) fell to 9.5%, which is the lowest level since April 2008.  Consistent with last month’s report, figures for past two months were revised higher.  August was revised higher again, as the economy added 176k jobs (from an initial report of 151k). September had a large upward revision, as 191k jobs were created versus the initial 156k figure reported.  This results in a three-month average of 176,000 jobs created.

Given the similarity of this report to previous months, we believe it is consistent with a labor market that remains supportive of economic growth.  The U.S. economy has created an average of 181,000 jobs per month this year, and over 200,000 jobs during the past 12 months which is well above the Fed’s 100k estimate that supports low unemployment and economic growth.  Given commentary from the Federal Reserve this week, these figures suggest that a rise in their benchmark rate should occur at their December meeting.  In fact, the market now prices in an 80% probability of a rate hike, up from 70% earlier this week.

We view this report as a positive for the market and economy, as we near full employment it is encouraging to see continued increases in wages.  We believe this will support economic growth, as household spending represents nearly 70% of our Gross Domestic Product (GDP).  Still, the upcoming election has created a level of uncertainty that has been a drag on the market, with the S&P 500 falling for 8 consecutive days although cumulatively it is down less than 3%.  Given this uncertainty, we raised cash balances in client portfolios earlier this week, while adding to our financials exposure to position for rising rates.  We will continue to monitor the current environment and deploy cash as we see opportunities to invest at more attractive levels.