Market volatility and the link to US economy

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With all the noise and market focus over the last few weeks centered around Cyprus, it has been easy for many to forget about what is happening across the Atlantic, in the US economy. With US share markets also hitting all-time highs recently, a mere scan of the headlines might have led one to believe that all was well in America, and that a strong economic recovery was underway.

All may not be as it appears.

A report released Friday about the state of the US employment market highlighted clearly that there are still areas of concern. Companies like Goldman Sachs, Deutsche Bank and Bank of America estimated that somewhere between 160k to 200k Americans would have found work in March, but the actual number that was reported was only 88k, highlighting the huge challenges Americans continue to face when looking for work, some 5 years on from the supposed end of the Global Financial Crisis (GFC).

Not only was the actual number of jobs reported very disappointing, but worse, the number of people who left the Labor Force (i.e. not only aren’t they working but have quit even looking for work) rose by over 600,000 people, pushing the Labor Force Participation Rate (LFPR) down to a level not seen since 1979. A falling LFPR is a sure sign that the US economy is not recovering in any meaningful way, as if it were recovering, and people were more optimistic about their job prospects, they’d be entering the labor force, not leaving it in droves.

The falling LFPR also ‘hides’ the true unemployment picture, as people not in the Labor Force don’t count in the official unemployment statistics. Real unemployment is much closer to 12% than the mid 7% range we are hearing in the mainstream media.
Difficulty in finding jobs has also led to more than 20 million Americans needing to claim ‘food stamps’ in the last 5 years, with the total now approaching 50 million (nearly 1 in 6 Americans).
The market reaction to this data release was as swift as it was predictable. Stocks fell, whilst bond prices and gold prices rallied. The Australian stock market dropped below 4900 which slows down the argument of a bull run on equities.

The extraordinary challenges the US economy continues to face, does impact the Australian equity market and reminds us that recovering from the GFC to get equity prices back around 2007 levels is going to take a lot longer than many advisers and economists predicted. Current policies of more spending, higher debt and money printing to fund it all will only add to the problems. Protecting wealth in a diversified portfolio is a smart strategy for
dealing with this volatile economic environment.


Jordan Eliseo
Investment Consultant