The Great Resignation is over.
At least that’s what the latest job market data suggests.
And that could be very good news for your portfolio this year (more on that in a moment).
But first, a bit of background.
The Great Resignation is the term economists and market analysts used to describe the phenomenon of millions of Americans dropping out of the labor force in the wake of the COVID-19 pandemic.
You can see how dramatic this trend was in the job quits rate, a figure put out each month by the Bureau of Labor Statistics.
Millions of Americans have completely dropped out of the labor force since mid-2020. They are neither working nor looking for work.
And that has pushed the labor force participation rate down to a level not seen since 1977, before working women became the norm.
Out of the Rat Race
Economists would say these job quitters chose leisure over income. Some were retiring early and living on their savings. Some went back to school. And many – according to media accounts – decided to just live on less.
But – thankfully – it seems to be coming to an end. As you can see in the chart above, the quit rate peaked at 3% in early 2022 and has been slowly falling since.
It’s also evident in the labor force participation data. The participation rate ticked up again in March to 62.6% – not a huge jump up but trending in the right direction.
And as more Americans rejoin the labor force, that will eat away at the overabundance of job openings. The number of unfilled jobs dropped below 10 million in March, the first time that has happened in two years.
Today there are 1.7 open jobs for every unemployed worker. That ratio had hovered around 2 for several months.
And that oversupply of jobs contributed to the nearly 20% drop in the stock market last year – as measured by the S&P 500.
Watching the Fed
You see, the Federal Reserve watches the participation rate and the job openings-to-unemployed ratio very closely. A larger ratio of open jobs to available workers pushes wages up, because companies must pay more to attract and retain workers.
So the Fed firmly believes that is a primary driver of inflation. That’s why Chairman Jerome Powell and his colleagues kept raising interest rates while that ratio was high and rising.
Those rising interest rates hurt investors’ portfolios because we know not to fight the Fed. (That is, to not go “risk on” when the Fed is raising rates.)
So now, with participation rising again and available jobs falling, we may be seeing the end of that inflationary spiral.
Even better, new research on the participation rate indicates that demographic trends – particularly the aging and retirement of baby boomers – are a big part of the drop. When you adjust for those, you find that the labor market is actually recovering more rapidly than many thought. This is clearly shown in the chart below, with data from the New York Fed.
That could be good in two ways, especially for younger workers…
First, as the baby boomers continue to retire, there will be additional opportunities for younger workers to fill their positions, especially at more senior levels.
Second, the recent research on labor force participation indicates the Fed has better knowledge of the factors driving the participation rate down. So perhaps it can adjust its policymaking to rely less on the blunt instrument of higher interest rates.
That’s very good news for markets… and for our portfolios.
Bottom line: This is yet another indication that the Fed is nearing its peak on interest rates. When we hit that peak and rates stabilize or even begin to come back down, the market should rally strongly.