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Labor market: ‘The pandemic effects have to burn off before you get to normality’, strategist says

Harris Financial Group Managing Partner Jamie Cox examines employment data following the November jobs report, while also discussing sector trends.

Video transcript

SEANA SMITH: And joining us now, I want to bring in Jamie Cox, Harris Financial Group managing partner. Jamie, it's great to have you. So certainly that stronger than expected jobs report putting pressure on the markets, at least, over the majority of the day. We're seeing a bit of a reversal here in the final hour or so of trading. What do you make of the action that we're seeing?

JAMIE COX: Well, this morning was your typical overreaction to data. Markets have been conditioned to think that good jobs numbers mean more and more robust interest rate hikes. And I think if you've been paying attention to Chair Powell over the last couple of weeks, you know that's getting ready to change.

And so you see the relentless bid for duration in the 30-year Treasury, which spiked immediately after the jobs data was released and now is actually lower on the day. So what we're seeing is a good transition, where, for the majority of the year, markets were cut offsides, thinking that the Fed wasn't going to go as much. And now some of the markets are caught offside, not realizing the Fed is actually going to back off.

So these are good things. It's actually nice to see the market kind of calm down and operate normally for once. So I'm really actually thinking that what we're seeing in the data is actually the things that soft landings are made of, where you have the inflation in data really meaningfully starting to decline. And you're not seeing meaningful dropoffs in employment. So if we're lucky, we might be able to skirt recession.

But at this particular point, I think the base case is recession in the back half of 2023. But maybe we'll get lucky and not have it happen that way, but the inflation data needs to cooperate to keep the Fed off the accelerator and get it to actually get to a point where they can stop raising interest rates, and maybe even cut them in the early part of June or July of next year.

DAVE BRIGGS: So then, Jamie, why are you not as concerned about the labor force participation rate not rebounding and the fact that wage growth remains high, 5.1%, on this report?

JAMIE COX: So a couple of things. The first is that I think that the labor force participation rate will improve, number one, and number two, and I think it's going to be largely a pandemic related effect that will burn off over time. So this is something that will adjust and work itself out. And we're paying a little bit too much attention to it, largely because there was such a large retirement wave of people over the last 18 months.

That's going to stop. You're not going to see people retiring in the ways that they were then, and you'll see a normal and ordinary return to normality in the labor force participation rate. Now the wage growth piece, I'm not so certain that we're not-- if you look at the totality of wage growth and not just look at it in a short period of time, it's actually kind of nice to see that wages are up because for the largest part of the decade, they were down.

And so the little bit of catchup that we've seen is actually good. So as long as it doesn't get meaningfully higher from here, it's going to be fine. There will be adjustments to the data over time that will be just fine. So I'm not worried about it.

Most people are worried about it because they think it's going to turn or translate or manifest itself in a wage price spiral. That doesn't look to me like it's happening or has a really good chance of happening. What I think is just what you're finding is that labor was underpriced for many, many years, and you're actually seeing it being repriced to trend. And that's a good thing.

SEANA SMITH: So Jamie, there's no concern, then, though, at all that this is pointing to inflationary pressures because I think that's the main concern of the market. I guess, why are we seeing such a disconnect then?

JAMIE COX: Well, there has been a disconnect in all of the major data since the pandemic. Everything has been flipped upside down. And we're still dealing with the effects of it. And you have all this cheap labor overseas, which remains offline. I mean, if you think about all the translations and all the transition that has occurred with China still being unable to get itself back upright, when you think about what we saw pre-pandemic, you had lots of competition for labor.

Well, you don't see that as much a phenomenon now. But it's going to get back to that place probably not too far in the distant future. And I feel like once that cheap labor really comes back online in earnest, you're going to see that competition re-enter and the wage growth piece sort of, like I said, work itself out. The pandemic effects have to burn off before you actually get back to that normality. That's why you've seen such lumpiness in the data.

But I think one of the things that is becoming very clear is that a lot of the pieces of the equation this year that may have made the data even more lumpy, like gas price spikes and things like that, what you're seeing in gas futures finally is you're starting to see them-- actually, the entire lump in the data has actually resolved itself and actually lower on the year in gas futures. So that's actually a good thing, too.

So some of the things that contributed to extra problems for the inflation data has started to work itself off-- used cars, lumber, now gasoline. These are very positive signs. And that could keep us moving in the right direction, and not avoid a recession, but at least skirt the difficult forces of recession.

DAVE BRIGGS: Quickly, Jamie, want to give people some news they can use for the weekend. You say healthcare is the smart play, given the setup you've laid out. Why?

JAMIE COX: Well, you've had a strong dollar. And in previous market conditions, we had weak dollar, strong euro, strong pound, et cetera. So when you own US-based companies, you had the translation of currency that would boost your earnings. Well, the reverse is true right now. And so the sectors that-- or one of the sectors of the sector that benefits the most from that is healthcare.

A full 37% of healthcare earnings are US-based, but the companies are largely based in Europe. So if you own those companies, they report their earnings, translate them to dollars, you get a nice translation boost there. And that has not been in play for many years. So healthcare companies are a beneficiary of that.

In addition, in every single market decline, bear market, you have a new leadership group. And that leadership group is going to be healthcare. The amount of research and development that went on throughout the pandemic, we're going to see remarkable changes in the way healthcare is delivered over the next couple of years over the ensuing decade.

And the amount of money that will be made in healthcare is remarkable. Biotech, Regeneron, AstraZeneca, you can just count one right after another. These companies are really, really fit to be the leadership group coming out of this bear market. And they weren't a bad place to hide out while you were in the bear market either, which is an unusual circumstance. So if investors are looking for good places to find opportunity, that's a good place to look.

DAVE BRIGGS: And that's a good place to leave it for the weekend. Enjoy it, sir. Jamie Cox, appreciate you being here.