This morning, we learned U.S. job openings fell to their lowest levels since March 2021. 

And the report could not have come at a more important time.

The U.S. labor market is now cooling pretty rapidly. 

In the last few weeks, we’ve had:

• U.S. Non-Farm Payrolls are disappointing. Remember the U.S. needs to add about 100k jobs each month to keep the unemployment rate stable, and NFPs are converging towards this number.
• Revisions to March 2022–March 2023 NFPs, which lowered the private jobs added in this period by about 30k per month on top.
• Alternative live job market gauges like the Indeed or LinkedIn hiring rates continue to point to weakness building up.
• Quit rates in the private sector are down to 2.50%, which is the lowest level seen since 2019. Fewer people are feeling comfortable quitting their jobs today as the labor market slows down.

Why is this good news? 

As Fed watchers know, this is Chairman Powell’s preferred indicator of the job market. 

Last week, Jerome Powell stole the economic show with his comments being streamed live from Jackson Hole. 

Powell maintained a hawkish tone regarding rate hikes. He also reconfirmed the Fed’s goal of getting inflation – that’s been stickier than many expected – back to its targeted 2% rate. 

That brought the odds of a 25-basis point (0.25%) rate hike next month up to about 67%. 

It also boosted the odds of one more similar hike before the year closes. 

But with the labor market cooling, the Fed may be more willing to ease on the hawkish tone. 

Bonds took notice and have rallied, with the 10-Year note yields falling from an important breakout level that could have really hurt equity prices had they kept moving higher. 

With rates falling, stocks have started to perform better after a difficult month. 

Stocks have pivoted from a lower trendline and target I had set at the beginning of August. 

The chart below shows the Nasdaq futures which are up nearly 2% on the day. 

I cannot understate the importance of interest rates. 

Stocks have been up this year, but it’s not been because investors think companies will bag bigger profits in the immediate future. 

In fact, Wall Street analysts think companies in the S&P 500 will see earnings per share rise just 1% in 2023, compared with 2022.

The S&P 500, on the other hand, is up 17%. In other words, share prices are outpacing puny expectations for profit growth.

What has happened is that investors have been willing to pay an expanding P/E multiple, which has sent stock prices higher. 

Economist Edward Yardeni publishes the following graph, which provides an analysis of the weekly forward earnings multiple of the S&P 500 by increments of 2, between 10X to 24X earnings.

This provides an easy way to see how price tracks the parallel channels of earnings multipliers. Yardeni refers to this as his Blue Angel analysis, named after the flying Blue Angels who always fly in parallel formation.

If rates were to continue higher, then it would normally imply that investors would pay a lower multiple for stock earnings which would lead to lower stock prices, all else being equal. If earnings also start to fall, then this can compound on the downside.

The current earnings multiple remains above the historical average, but if rates continue to drop back here, it may give stock investors some breathing room. 

This year has been a year where the market’s speculative pulse has been rising and bullish sentiment has been the rule. 

Normally these periods occur when monetary policy is “easy” which clearly has not been the case this year. 

To be clear, the Fed shows no signs of easing, but with inflation in retreat this year, investors have been willing to bet on the if-come. 

Today’s weak labor report may breathe some life back into the growth stocks. 

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