Could Prolonged Worker Shortages Affect the Stock Market?

(Please enjoy this updated version of my weekly commentary from the POWR Value newsletter).

Even with the delta variant surging, the economy is moving along. The July employment report showed substantial progress toward full employment, as 943,000 payroll jobs were added, and the unemployment rate fell to 5.4%.

However, 9 million Americans remain unemployed, and last week's Job Openings and Labor Turnover Survey (JOLTS) report showed that the number of job openings is now more than the number of unemployed Americans by 1.3 million.

This means businesses are dealing with severe worker shortages, as evidenced by the NFIB July survey, which resulted in 49% of small business owners reporting job openings they could not fill. This was created through a mix of generous unemployment benefits, virus fears, childcare responsibilities, and job openings not being a great match with unemployed workers.

The good news is that with vaccines being deployed, schools reopening, and enhanced unemployment benefits expiring next month, the labor-force participation rate should recover. Plus, as service sector activity increases, many of these open jobs should eventually get filled.

But investors continue to receive mixed messages in terms of inflation. The good news is that the consumer price index (CPI) increased by 0.5% sequentially in July. This was a deceleration from the 0.9% in June and the smallest month-over-month uptick since March.

Core CPI, which excludes volatile food and energy costs, came in at 0.3%. The CPI's slowdown aligns with the Fed's narrative that these increases in consumer prices are transitory. But the bad news was that the producer price index (PPI) increased by 1.0% sequentially for a second consecutive month and higher than expected.

Moving back to the positive, the Senate passed the 1 trillion bipartisan infrastructure package, which includes approximately USD 550 billion in new spending. This bill aims to rebuild transportation infrastructure, improve access to the internet in rural areas, and upgrade the electric grid and water systems.

Once passed by the House and signed into law by the President, it should provide an additional stimulus to the economy, further adding to the bull market narrative. As we head into the final stretch of earnings, we need to consider the revenue upside we saw this quarter.

This reflects the improving economy and pricing power large companies enjoyed. In the second quarter, we saw the most significant upside surprise to sales ever. This is excellent news as sales are much more likely to be sustained than earnings, which can be manipulated.

Plus, another consideration is the strong outlooks that companies provided. This suggests there could be a lot more upside to go. While we are likely to see some deceleration in the third quarter in terms of growth, and earnings and revenue surprises, I do expect this momentum to continue.

So even amidst mixed data, stocks continue to trade at or near their all-time highs. I expect to see continued volatility over the near term, but the economy continues to rebound, which bodes well for the market.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $443.89 per share on Tuesday afternoon, down $3.08 (-0.69%). Year-to-date, SPY has gained 19.50%, versus a % rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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