This week, news surrounding job reports has reignited investor concerns about a declining labor market. The latest employment data from the Bureau of Labor Statistics, released on Friday, highlighted a troubling economic landscape. In August, the number of jobs added fell short of economists' expectations by more than 70%. Additionally, the unemployment rate reached its highest level since 2021, signaling potential challenges ahead.
New data released on Thursday showed a concerning trend: first-time claims for unemployment benefits surged to an 11-week high. Layoff announcements have also soared, reaching levels not seen since the pandemic and the Great Recession. Private-sector businesses have sharply curtailed hiring efforts, marking August as the worst month for layoff announcements since the pandemic. Furthermore, the August jobs report included a downward revision of the June employment figures, indicating a loss of 13,000 jobs that month. This marked the first negative employment report since December 2020, effectively ending the second-longest period of employment expansion on record.
The alarming data raises questions regarding the credibility of employment statistics presented by President Trump and other officials. E.J. Antoni, appointed to lead the Bureau of Labor Statistics after the dismissal of former chief Erika McEntarfer, previously suggested suspending the monthly jobs report in favor of quarterly reports. However, he seems to have stepped back from this proposal for now.
Market watchers and analysts are closely scrutinizing these labor reports for signs of a changing economy. Veteran Wall Street analyst Jim Welsh, who has over 40 years of experience in portfolio management, warns that the deteriorating labor reports may be the only barrier preventing a significant decline in the stock market. Welsh, who writes the Macro Tides and Weekly Technical Review newsletters, has a history of accurate market predictions, including foreseeing the sell-off that accompanied the Great Recession in 2008.
Welsh argues that the economy is currently in a 17-year “super cycle” that could lead to major troubles within the next two years. He acknowledges that advancements in artificial intelligence have temporarily alleviated some economic pressures but believes that the stock market still has some room for growth. In a recent interview on “Money Life with Chuck Jaffe,” Welsh suggested that a short-term pullback of 3% to 7% is likely, before the S&P 500 rebounds to new highs between 6,600 and 6,800.
Welsh emphasizes that the labor market is a critical indicator to watch. He noted that if weekly claims for unemployment benefits exceed 275,000, it would signal significant trouble ahead for the economy. As of now, the most recent weekly claims stood at 237,000. Welsh explained that the current balance—where job growth is minimal but layoffs are not yet evident—has contributed to sustained consumer spending. However, any shifts resulting in negative job growth and increased layoffs could lead to a more pronounced economic slowdown.
Welsh has been vocal about the potential for the market to decline, highlighting a significant divergence between the S&P 500 and the advance/decline line on the New York Stock Exchange. He believes that if the S&P continues to make higher highs while the advance/decline line fails to follow suit, it could serve as a warning sign for a potential market drop of 10% to 15%—similar to declines observed in March and April.
Welsh predicts that any decline could be just the beginning of a more extended bear market, rooted in the historical 17-year cycle that began in 1939. He pointed out that previous cycles have led to significant downturns in 1956, 1973, 1990, and 2007. While 2024 may seem like a likely year for trouble, Welsh notes that the cycle's timing is less about the calendar and more about when preceding cycles begin and end.
In his analysis, Welsh stated, “We’re approaching an inflection point where valuations and household investment levels in the stock market are at record highs. If the economy begins to slow down significantly, it could trigger a deeper and more prolonged decline in the market.”
If Welsh's predictions hold true, investors may face significant challenges. He believes that, based on these 17-year cycles, the S&P 500 could drop to significant lows, with an initial target of 3,500 and potentially reaching 2,200 or even 1,600 in the long term. This projection corresponds with previous market peaks in 2000 and 2007.
Welsh is not alone in his concerns; even Warren Buffett has amassed $347 billion in cash, representing 30% of his portfolio, indicating caution amid current valuations. Welsh warns that the U.S. government’s spending issues, with a deficit exceeding 6% and rising interest payments, could exacerbate economic challenges, making it difficult to address debt without hindering economic growth.
