- The September jobs report exceeds expectations, adding 254,000 jobs and boosting investor confidence.
- But Jon Wolfenbarger says trends still point to a recession ahead.
- This is while S&P 500 valuations remain high, putting the market at risk for big declines.
The September jobs report gave investors renewed hope that the labor market continues to withstand the interest-rate hikes instituted by the Federal Reserve over the last couple of years.
The 254,000 jobs added, according to the Bureau of Labor Statistics, well topped economists' expectations of 147,000.
But Jon Wolfenbarger, the founder of investing newsletter BullAndBearProfits.com, still sees a negative trend prevailing in the job market — and said in a recent note that the September report even showed cause for concern despite the strong headline number.
That cause for concern lies in the number of government jobs added — 30,000 in September and around 500,000 over the last year. The sector has added the second-highest amount of new positions behind the private education and health services sector. This continues a trend of a growing ratio of government jobs to private jobs.
Wolfenbarger, a former investment banker at JPMorgan and Merrill Lynch, pointed out that this ratio tends to increase in recessionary environments and said it's "not a sign of a healthy jobs market."
Wolfenbarger is also concerned about other recent job data. He said the share of consumers in a survey from The Conference Board who say a job is hard to find is near 20% now, which could be bad news for an unemployment rate that has already risen significantly in recent months.
Job openings, new hires, and quits data also show a broadly slowing labor market. Quits fall when employees lack confidence in finding a new job, and new hires and job openings data backs that reality up.
Finally, the number of full-time employees has dipped into negative territory year-over-year, which has tended to happen during recessions.
All of this is unfolding as the S&P 500 continues to soar, closing at an all-time high on Friday afternoon. Valuations are also elevated across the board. In a September note, Wolfenbarger shared the below chart from Bank of America showing 19 of 20 valuation measures they monitor as being overvalued.
Given valuation levels, Wolfenbarger said that a recession would threaten to throw the market into a downward spiral.
"The valuation metric in this list that most accurately forecasts long-term (10-12 year) returns is the S&P 500 Market Cap to GDP ratio," he wrote in the September 16 note. "It is currently 147% above its historical average since 1964. That means the S&P 500 would have to fall 60% just to return to the historical average. If it fell below the average, the decline would be even worse."
Wolfenbarger confirmed in an email on Friday that this still accurately reflects his views.
Wolfenbarger's views in context
Recent labor market weakening has put some economists and strategists on higher alert. But generally, a soft-landing consensus prevails on Wall Street, particularly after September's payrolls report.
Markets now expect the Fed to take a more cautious approach to cutting rates so as not to flare up inflation again, whereas growing recession worries had investors cheering on a 50-basis-point cut in the weeks leading up to the Fed's September meeting.
But it's still unclear how accurate the September jobs data is. David Rosenberg, founder of Rosenberg Research, said in a note this week that 75% of initial headline jobs additions have been revised down in the last year. Future revisions and further lackluster jobs data could resume investor fears that a downturn is a serious potential threat.
As for Wolfenbarger's stock-market views, the S&P 500 has not seen such an aggressive decline since the Great Recession — one of the worst downturns in history. And many economists say that a potential recession would be shallow, putting Wolfenbarger's views on the margin versus Wall Street consensus.
But in a market where investors have been eager to snap up gains from AI stocks like Nvidia, a sudden reversal in sentiment driven by poor economic data could prove painful for investors, even if not to the degree Wolfenbarger expects.