Weak Job Market Signals Shift Away from Easy Money

The U.S. labor market is weakening, reducing the flow of passive dollars into the stock market. Both labor supply and demand are declining simultaneously.

Supply-Side Pressures:

• Immigration into the U.S. has fallen from roughly 2 million annually since 2020 to near zero today.
• Demographics are slowing population growth: from 1.8% post-WWII to 0.5% currently.
• Aging population: Over 4.1 million Baby Boomers are turning 65 each year from 2024–2027 (~11,200 daily).
• Labor Force Participation Rate (LFPR) peaked at 66% with baby boomers, remained stable from 1990–2008, and has now fallen to 62%.

Demand-Side Pressures:

• AI adoption is suppressing hiring, with estimates of 200–300k job losses in 2025 alone.
• Debt-laden economies, rising interest rates, and slower growth depress job creation.
• U.S. bonds’ 40-year bull market has ended; persistent inflation (>2% for 5 years) and $2T annual deficits are fueling a $39T national debt. Higher yields on debt suppress business formation and expansion.

The result: employment growth has stalled. January 2025 had 170.7M workers; today it’s 170.4M. Fewer employed individuals mean less money flowing into 401(k)s and the stock market, reversing trends seen over past decades.

Recent Economic Highlights:

• U.S. spent $11.3B in the first week of the Iran war.
• Home foreclosures rose for the 12th consecutive month in February (+20% YoY).
• Private credit default rate climbed to 9.2%, exceeding 2008 crisis levels. Q4 GDP revised down to 0.7% from 1.4% estimate (Q3 was 4.4%).
• Fed added $18B in base money supply last week.
• January core PCE inflation: 3.1% (well above 2% target); headline: 2.8%. Post-Iran war, energy price spikes will likely push headline higher.
• February PPI: 3.4% YoY; core PPI: 3.9% YoY (rising from January’s 2.9%/3.4%).

The Fed did not cut rates in March, and future rate reductions are unlikely as inflation remains elevated. War-related energy price spikes further complicate monetary stimulus.

Market Valuations:

The stock market is historically expensive, with Total Market Cap/GDP at 220% (vs. 50% in 1975–1990).

Geopolitical Outlook:

• Low probability scenario: Iran surrenders enriched uranium and reopens the Strait of Hormuz in exchange for bombing cessation—unlikely due to U.S. and Israel demanding regime change.
• More probable: war scales down over weeks, partial shipping resumes, oil prices moderate to ~$80/barrel. This scenario limits aggressive market shorts but allows portfolio hedges against stagflation.

Investment Strategy:

• Favor precious metals, energy, and defensive stocks.
• Short rate-sensitive stocks and bonds.
• Stagflation makes buy-and-hold 60/40 portfolios risky; active management through inflation/deflation cycles is a better approach.

Sources: Michael Pento