Risk markets are having a rocky ride this year. Post this fabulous performance at the very start of the year the S&P index corrected sharply and tanked more than 10% in early February, bounced back into mid March and subsequently plummeted another close to 10% before working its way back again. We have since gradually recovered but still hover around 5% below the all-time high of late January. Stock volatility will remain upon us, or so it seems.
The majority of the pundits have been very cautious in their outlooks, for a number of reasons. The Fed appears bent-on hiking rates ever more this year and into next. Long yields have consequently been rising and toying with finally breaking the camel’s back of the 3 decade-long bond bull market. Most forecasts see rates materially higher from here. Growth has been respectable, and so have corporate earnings been spectacular. People just don’t want to believe this to be a one-way street.
They have also been gravely concerned about geopolitics and trade. North Korea is a fickle issue, not one that will be resolved quickly. Ups and downs are literally prescribed in this process of engagement. Iran and the Middle East have been more of a hotbed than in the past. Latin America seems less stable again. China’s conduct in the South China Sea has turned into a true thorn in the side of America and other stakeholders. And a renewed Cold War with Russia has become a real possibility.
Tariffs and trade sanctions are poison for the world economy, and markets have been very sensitive to the issues. No longer are we talking about the marginal effects of measures against smaller countries such as Iran. The Trump administration has gone all-out to confront Asia and Europe, historical allies included. The generally accepted world order of the post War era is for the first time in real danger, and the fundamentals of WTO and decades of respective efforts in limbo.
No wonder the pundits have been tip-toeing not to be caught on the wrong foot. Confusion reigns on the back of unexpected de-correlation trends and blatant market manipulation by world leaders like Donald Trump. A kind of negativism not seen since the massive correction in early 2016 has become widespread and some self-appointed sages have continually warned about a transformational stock market crash coming.
But is that so? Certain areas in the market seem to know no such boundaries. If I watch the tech sector for example, and despite the overnight pullback, I see nothing but bullish signs. Look at bellwethers such as Apple, Amazon, Alibaba, Microsoft, Intel or Nvidia. Their stock prices have quickly recovered from the selling pressure and made new record highs this week. They have literally broken out and gathered momentum for their next leg up. Others are following suit. The bull market in tech has impressively been confirmed.
Now, why tech, and when will it ever end? It may not for a while to come, particularly in the US. And it may all be very much connected with what is happening in the labour market. Remember, the policymakers are thumping their chests on the back of the employment numbers. The talk about a tight labour market has its merits, if only it was conducted in the right context.
What people seem to be missing here is that at the end of April, and for the first time since record-keeping in 2000, the number of job openings exceeded the number of unemployed in the US, ie 6.7 million openings faced off 6.3 million unemployed. There are in fact American companies out there that have thousands vacancies each but are unable to fill them. It does in fact tell us that the market is tight.
However, the issue for these employers is not that they cannot find labour but rather that they cannot find qualified labour. Tens of thousands of jobs cannot be filled because the available labour pool does not possess the skills required. At the same time, the Trump administration has curtailed immigration that could mitigate such shortfall. This is part of the reason why there is no wage growth, something policymakers have long been scratching their heads over.
Against this background, employers will be left with hardly any option but to further and acceleratingly automate their production and services and have the robots pick up the slack. What does that entail? Mostly software and computer processing capacity, ie tech. The market has been picking up on the described dynamic and making its renewed bets on the sector. The widely labelled Internet-of-Things will be the next step to counter a labour market that is too tight in the context of skilled labour simply isn’t available.
