Transcription
Something unusual is happening in the US economy right now. For the first time in more than three decades, two indicators that usually move together are pulling in completely opposite directions.
This line shows the percentage of consumers who expect the stock market to rise over the next year. And that number is sitting near record highs, even higher than during the late 1990s.com bubble. This other line represents the consumer confidence index, which is now hovering near some of the weakest levels ever recorded. So on one hand, consumers are extremely optimistic about stocks, but on the other, they've rarely felt this pessimistic about their own financial situation.
Those two things are not supposed to happen together. And it might look like trouble is brewing for the stock market. But this divergence didn't appear out of nowhere. There's a deeper force driving it. And understanding that may tell us a lot about where this cycle goes next.
This consumer confidence data comes from the University of Michigan's survey. It asks households how they feel about their personal finances, business conditions, and whether now is a good time to spend. And while many factors feed into that survey, one of the biggest drivers tends to be the labor market. When jobs are plentiful, people feel secure. They're confident they can keep earning. They're more willing to spend. But when hiring slows or layoffs rise, confidence tends to fall quickly. People pull back. They become cautious.
So, if consumer sentiment is sitting near record lows, that should mean the job market is not in a good shape right now. And indeed, if we look at the job market data, like the total job openings, we can see they've weakened sharply. Since peaking in 2022, total job openings in the US have fallen by nearly 50%. There are now roughly 6.5 million open positions, a level we last saw heading into the 2020 recession. At the same time, around 7.5 million Americans are currently unemployed and actively looking for work. In other words, there are now about 1 million more job seekers than available job openings.
What makes this cycle different, however, is that the stock market doesn't seem to care about this weak labor market. And historically, that almost never happens. Since 2001, both the S&P 500 and job openings have moved together quite closely. And that relationship makes lots of sense. When companies grow, they hire more people. But when the economy and business slows, hiring typically pulls back. But that relationship started to break in late 2022. Since then, the S&P 500 has nearly doubled in value, while job openings have continued to trend lower. And if the consumer surveys we saw earlier are any indication, this gap could widen even further.
One explanation investors often point to is the Federal Reserve. The logic goes like this. If the labor market weakens, the Fed will cut interest rates to revive it. Lower rates reduce borrowing costs, ease financial conditions, and help stabilize hiring. But they also tend to support asset prices. And if we overlay interest rates on top, we can see that this has been the case. In 2022, the Fed hiked rates aggressively to fight inflation. Both the stock market and job openings rolled over. But as the labor market cooled, the Fed stopped tightening. And by 2024, it had begun easing. And that easing has been one of the main things that have driven stocks higher over the past couple of years.
So naturally, with job openings drifting lower again, many investors assume the same playbook will repeat this year, potentially allowing the stock market to climb further while job openings eventually stabilize or recover. But that may be an oversimplified view of how the financial system actually works. See, even with job openings falling, markets aren't pricing in aggressive rate cuts. In fact, the current Fed chair has indicated that the central bank may only deliver one additional rate cut throughout 2026. It's because the Fed is trying to balance two very different risks. On one side, they don't want a weakening labor market to turn into a recession. But on the other side, they also don't want inflation to reacelerate. If they cut too aggressively while inflation remains sticky like right now, they risk reigniting price pressures. And that would create a whole new set of problems for the economy.
So, if markets aren't expecting the Fed to aggressively cut rates this year, then something else would need to carry stocks higher, especially if we're talking about another leg up over the next 12 months. And this is where many analysts point to a different possibility. Not policydriven growth, but a cyclical pickup in the economy itself.
This chart shows the US manufacturing PMI. Think of it as a real-time pulse check on the economy. When PMI is above 50, it means manufacturing activity is growing, which usually means the economy is in an expanding cycle. When it falls below 50, activity is contracting, a sign the economy is slowing. Since 2022, we've mostly been stuck in that contraction zone with PMI hovering below 50. But more recently, we finally seen US manufacturing move back above 50, signaling a return to expansion.
One possible explanation is timing. When the Fed started cutting rates in 2024, financial markets reacted almost immediately. But the real economy doesn't move that fast. Research often suggests it can take anywhere from 1 to two years for rate changes to fully filter through to hiring, investment, and production. And if that's true, we're only now entering the window where the 2024 rate cuts would begin to meaningfully show up in the real economy. So if PMI continues to climb from here, and broader economic activity starts to reacelerate, the labor market could eventually stabilize and turn higher as well. In fact, if we overlay PMI with job openings, we can see that a pick up in the PMI is usually followed by a rise in job openings like here in 2002, 2009, and again in 2021. In that scenario, it's possible that the stock market has simply been moving ahead of the data with job openings eventually catching up. Of course, that would require economic momentum to strengthen and no major external shocks such as a geopolitical event to derail the recovery.
At Capital.com, we'll continue tracking the labor markets, monetary policy, and business activity, and what they mean for investors navigating this cycle. Thanks for watching.