Zacks Investment Management

Jobs Market and Service Sector Strong, $3.4 Trillion on the Sidelines

In today’s Steady Investor, we look at what is going on in the markets and key takeaways and questions for investors to consider, such as:

• Two key factors driving continued economic growth: jobs market and consumer spending
• What data point could be a key sign that a recession may not be as imminent as is widely believed?
• Asset flows suggest that investors are more skittish than ever
• Will “Phase 1” of the Trade Deal reduce tariffs?

An American Who Wants a Job Can Find One – The jobs market and consumer spending are two key factors driving continued growth in the U.S. economy. We often hear about the strength of the labor market with each month’s ‘non-farm payrolls’ report, which tells us how many jobs the economy added. But another data point that is less discussed – but perhaps even more significant – is that the number of job openings exceeds the number of unemployed Americans. Before 2018, the number of available jobs had never been above the number of unemployed, dating back to 2000 when the records start. In all, there are 1.26 million more jobs available than there are unemployed people. ¹ Bottom line: It seems an American who wants a job should be able to find one.

Services Post Another Strong Reading in the U.S. – While factory activity and manufacturing continue slumping across the world, the services segment – which matters more to developed countries’ output – has been seeing sustained strength. Last month, the key measure of services – the ISM’s non-manufacturing index – jumped to 54.7%, marking a rebound from a September’s 52.6% reading. Notably, strong gains were seen in the Business Activity Index and in New Orders. Business Activity rose to 57% and New Orders clocked in at 55.6%, both firmly in expansionary territory. Since non-manufacturing activity (services) account for roughly two-thirds of U.S. economic output, this data is a key sign that a recession may not be as imminent as is widely believed.²

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About the Trillions of Dollars in Cash on the Sidelines… The stock market is hitting all-time highs and has posted strong year-to-date returns in 2019. But that doesn’t mean all investors are optimistic. In fact, asset flows would suggest that investors are more skittish than ever. According to Lipper data, there is currently $3.4 trillion socked away in cash on the sidelines, with assets in money-market funds seeing $1 trillion of new money over the last three years. One could argue that rising interest rates have contributed slightly to this increase in money market funds: In 2011, the average annual return in a money market was a paltry 0.02%, whereas today that number is up to 1.6%.⁴ But another plausible reason that investors are hoarding cash is that many are concerned about the longevity of this economic expansion and bull market, particularly as recession talk has risen over the past several months. Whatever the case, the bottom line remains that there is plenty of cash available to invest in equities should sentiment rebound.

Will “Phase 1” of the Trade Deal Reduce Tariffs? It appears as though the world’s two biggest economies are closer than ever to making real progress on a trade agreement. In what is billed as “Phase 1” of the trade agreement, China would agree to new purchases of American agriculture products; new rules would be put in place to discourage currency manipulation and protect from unfair technology transfer; and China would open up more of its market to American corporations. In exchange, both countries are also – in theory – agreeing to roll back or eliminate some tariffs, the most important of which are arguably the consumer goods-oriented tariffs set to go into effect on December 15.⁵

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