December 9, 2023 | Employment, JOLTs Report, Drug Companies, Magnificent Seven and Reviewing Income

Employment While the headline numbers for the jobs report showed results that beat expectations, when you look closely at the report it shows a softening labor market which is exactly what the Fed wants to see. Nonfarm payrolls in the month of November showed a gain of 199,000 which topped the estimate of 190,000 and the unemployment rate fell to 3.7% which was better than the forecast for 3.9%. The growth of 199,000 is below the average monthly gain of 240,000 and it is also important to point out that some of the gain in November was attributed to the end of the UAW and actors strikes. In fact, while employment in manufacturing increased 28,000 in November there was a 30,000 person increase in motor vehicles and parts as workers returned from strike. The employment in information also had a gain of 10,000 in the month, but motion picture and sound recording industries added 17,000 jobs as the resolution of labor disputes came to an end in the industry. The strikes have created volatility in the numbers over the last few months and that can also be seen in the revision to September where total nonfarm payroll employment was revised lower by 35,000. With these major strikes now behind us, we should be able to see a better reading in these job numbers moving forward. Another major area the Fed likely has their eye on is the change in average hourly earnings, which points to wage inflation. In the month of November average hourly earnings increased by 4.0%, which was the lowest reading since May 2021. Overall, this report points to the concept that a soft landing is still a real possibility. I believe the labor market will continue to soften, which should be good news for inflation and our economy.

 

JOLTs Report While it may not look like good news when reading the headline number, the JOLTs report showed exactly what the Fed is looking for. Job openings of 8.73 million in the month of October were below the estimate of 9.4 million and showed a decline of 617,000 or 6.6% compared to the previous month. This also marked the lowest number since March 2021. While this all sounds troubling, it shows the labor market is softening which is what the Fed has wanted to see. It also shows that the labor market is still doing alright considering there are still 1.3 job openings to every available worker. Pre-pandemic this ratio stood at 1.2.

 

Drug Companies The Biden administration has opened the door to seize the patents of certain costly medications from drugmakers. The administration has unveiled framework that outlines the factors federal agencies should consider in deciding whether to use march-in rights, which take patents for drugs and shares them with other pharmaceutical companies if the public cannot reasonably access the medications. Officials can now factor in the price of a medication in deciding to break a patent. While this may sound like a nice practice, I do worry about the long-term ramifications. While drug companies often do have nice margins on drugs that succeed, people generally do not discuss the billions of dollars that is spent on research and development for drugs that do not succeed. If drug companies cannot offset those costs with high margins on successful drugs, the industry could have major problems. Also, what would the incentive be to spend billions of dollars on research and development for a new drug, when you could just potentially wait for another company to come up with the solution and then use their patent that has been taken from them by the government? This could ultimately stifle innovation in the industry.

 

Magnificent Seven Remember a few years ago the FANG stocks? They have now been replaced by what is known as the Magnificent Seven which are Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. People still believe index investing is a great way to invest and diversify your portfolio, but when you look at the S&P 500 you should realize that the Magnificent Seven have carried the index to a year-to-date return of around 20%. If you look at that equal weight index it is actually only up around 6% this year. Also, in the index 44% of stocks are showing negative results. You may think you had diversification with the S&P 500 but currently the seven stocks account for close to 30% of the index. These companies stock prices have continued to perform, but history has proven time and time again that any equity trading at such high valuations eventually comes back to reality. When that happens investors in these seven stocks, and also the index will have disappointing returns. Unfortunately, I cannot tell you when it will happen, only that history has proven itself to be right 100% of the time.

 

Financial Planning: Reviewing Income at the End of the Year As we get closer to the end of the year, it is getting more important to review income levels and make any necessary adjustments before December 31st. Wh