Weak Growth, Tight Job Markets Are a Global Phenomenon
Economists cite ageing populations and relatively low immigration as factors that became more pronounced during the pandemic
Economists cite ageing populations and relatively low immigration as factors that became more pronounced during the pandemic
From Berlin to Tokyo to Sydney, economic growth is slowing or turning negative across advanced economies, yet labour markets remain historically tight.
Talk of a “jobful recession” has centred on the U.S., where payrolls grew by more than half a million in July and the unemployment rate declined to its prepandemic low of 3.5% even as economic output contracted in the three months through June. The same conundrum crops up around the world.
In Germany, growth stalled in the three months through June, and the country faces imminent recession as its energy supplies dry up. But the unemployment rate remains close to a 40-year low, and almost half of companies say worker shortages are hampering production. The jobless rate in the wider eurozone is at a record low. New Zealand’s economy shrank in the first three months of the year, but its jobless rate, at 3.3%, has stayed close to a multidecade low.
It is the opposite of the “jobless recovery” diagnosed after the 2008 global financial crisis, when economic growth in the U.S. and parts of Europe picked up but unemployment remained painfully high for years.
The current dichotomy might not last. Central banks are raising interest rates to rein in high inflation, which could in time undercut labour demand. The Bank of England on Thursday raised its policy rate by 0.5 percentage point, to 1.75%, and forecast a lengthy recession that would likely boost unemployment to 5.5% from its current 3.8%, which matches the prepandemic low.
Still, subdued growth may coincide with ultralow unemployment more often in coming years, judging by the country that experienced it first. For three decades Japanese growth has been low or negative, averaging 0.8%, but its unemployment rate has never been more than 5.5% and has ratcheted steadily lower since 2010 to stand at 2.6% now—close to its prepandemic low of 2.2%.
The reason, economists say, is a tight labour market because of an aging population and relatively few immigrants, features that have become more pronounced in other advanced economies during the pandemic.
In the years before the pandemic, Japan took steps to make it easier for mothers of small children to work, keep older workers on the job, and loosen restrictions on migrant labour, such as allowing foreign students to work 28 hours a week. But just as those measures were making an impact, the pandemic hit and Japan closed its borders to most new workers.
A shortage of workers forced Masaya Konno, a business owner in Tokyo, to temporarily close his Japanese-style pub last month. Even after he increased pay to ¥1,300 an hour, which is ¥100 to ¥200 above the wages prevailing a year ago, he still can’t find enough workers. “We couldn’t overcome a labour shortage,” Mr. Konno said.
Unemployment and growth usually show a predictable relationship known as Okun’s Law, named for the Yale University economist Arthur Melvin Okun, who first proposed it in 1962. In the U.S., Okun’s law predicts that a 1% decline in output below its potential causes an increase in unemployment of half a percentage point.
However, that relationship can shift depending on factors such as workers‘ output per hour and labour-force growth, said Laurence Ball, an economics professor at Johns Hopkins University. If there are fewer workers and job seekers, the labour market can remain tight even if growth is weak.
Since February 2020, the U.S. labour force has shrunk by about half a million. In Germany, the labour force shrank by about 350,000 over the same period, while in the U.K. it shrank by about 550,000.
Migration has slowed across advanced economies as governments restricted entry to keep out Covid-19 and its variants. In New Zealand, the number of people arriving with work visas shrank from about 240,000 in the year through June 2019, to just 5,000 in the year through June 2021, government data show. In the U.S., the slowdown in immigration began in 2017, when the Trump administration adopted a range of policies to curb both illegal and legal immigrants. The annual net inflow has fallen from more than one million in 2015-16 to about a quarter of a million in 2020-21, according to the U.S. Census Bureau.
Meanwhile, older workers dropped out of the workforce, in some cases to avoid exposure to Covid-19. Some younger adults quit work to care for children or other family members.
There are signs that as vaccines cut the risk of severe illness or death from Covid, workers have returned to the labour force and migration has resumed. In New Zealand, the number of people arriving with work visas surged to almost 5,000 this past June. That suggests unemployment may start to respond more to changes in economic output.
Other forces might be more durable, however. Older people aren‘t yet returning to work in the U.S.: The labour-force participation rate of workers aged 65 or older has fallen to about 23% from 26% in early 2020. Rapidly aging Germany and Italy are expected to lose millions of workers to retirement over the next decade, which suggests labour shortages will persist.
While sustained low unemployment is generally a boon, Japan’s experience also shows the downsides: It means that the economy isn’t able to quickly direct workers to growth areas, which can limit “creative destruction”—the elimination of obsolete industries so that new industries can grow.
Takahide Kiuchi, an economist at Nomura Research Institute and former Bank of Japan policy board member, said, “Japan’s economy may look more stable with mild inflation. But the flip side of a stable economy is the negative impact of slow changes in the industrial structure.”
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August 7, 2022.
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The best course when stocks slide is for investors to stand pat, but ‘put’ options are one way to hedge against a drop and lock in some profits
The past five years have been good to stock-market investors. The S&P 500 index has climbed an annualised 12% during that period, outstripping the 9% annualised gain over the past 40 years. This year alone the index is up 6.9% as of April 26, tacking on to the 24% gain in 2023.
But signs are emerging that the stock market could be due for a breather. As of April 25, the S&P 500 went 133 trading days without a decline of at least 10%, according to PNC Institutional Asset Management. To be sure, that’s still short of the 172-day average since 1928. But the S&P 500 has jumped 24% in the past six months (about 180 days), which buttresses arguments for a correction.
What’s more, the multiyear ascent has arguably sent stocks to overvalued levels. The S&P 500’s forward price-to-earnings ratio—a gauge of market valuation based on earnings estimates for the next 12 months—registered 20 as of April 26, exceeding the five-year average of 19.1 and the 10-year average of 17.8, according to FactSet.
“A correction is certainly possible,” says Jack Ablin , chief investment officer at wealth-management firm Cresset Capital, pointing to the high valuations and the prospect that rate cuts will come later than expected thanks to inflation that has been higher than expected.
Given the danger of a stock-market correction, commonly defined as a 10% to 20% drop, how can investors guard the profits they have made in recent years?
Assuming you have a well-diversified portfolio and aren’t counting on the money from your stocks to finance an imminent expense, financial advisers say the best strategy is to hang tight.
Corrections generally don’t stick around long. Since 1985, declines between 10% and 20% for the S&P 500 have lasted only 97 days on average—three-plus months—according to a CFRA analysis of S&P data.
It then has taken the market an additional 101 days on average to recover the ground lost during the correction. So in about six months, investors tend to be back where they were before the correction.
“If there’s a shallow correction of 5% to 10%, we recommend riding it out,” says Karim Ahamed , an investment adviser at wealth-management firm Cerity Partners. “Eventually the market recovers. The idea of selling out and climbing back in is difficult to achieve. You’re more likely to stay on the sidelines with your losses crystallising.”
The S&P 500 did fall more than 5% in recent weeks, from March 28 to April 19.
Some people, though, simply find it impossible to do nothing if they fear a correction is looming. At the least, they want to protect the gains they have earned so far. What’s the most prudent way for them to reduce their market exposure?
Keep in mind that most actions you can take to guard your stock profits carry a cost. The easiest method, selling stocks, subjects you to capital-gains taxes unless you are selling from a tax-advantaged retirement account. That tax rate varies according to your income, but will likely be 15%.
One way to limit the burden is through tax-loss harvesting, says Amanda Agati , chief investment officer of PNC’s asset-management group. That is when you sell stocks at a loss, lowering your net capital gain. If you have any dogs in your portfolio—stocks with poor fundamentals—you can unload those.
If you do sell stocks, you could put the proceeds into a money-market fund for now, financial pros say. Many such funds yield 5% or more, far higher than rates over the past 15 years. Or if you want to increase the safety of your overall portfolio, you could put the money into safe government bonds. Three-year Treasury notes yield around 4.75%.
If you are going to unload stocks, but don’t want to sell right away, you can put in a stop-limit sell order through your brokerage. That order can automatically sell your shares if they slide to a level you designate (they can go below it, too), protecting you from big drops.
Say you bought 100 shares of Tesla at $140, and they are now trading at $165. If you don’t want your profit to disappear in a downturn, you could enter a stop-limit sell order with your brokerage at $150 for some or all of your shares. Those shares can be sold if the price reaches $150, securing some of the gains.
You also might shift your holdings more toward defensive stocks, such as utilities and consumer-staple companies, which generally outperform during market downturns, says Michael Sheldon , executive director of wealth-management firm RDM Financial Group.
PNC’s Agati suggests an emphasis on quality stocks, those with high recurring revenues, strong and dependable profit margins, high cash flow and low debt. These stocks—such as AutoZone and Visa , she says—have lagged behind the leaders of the market’s surge over the past year.
Advisers also suggest looking at “put” options to protect your stock gains. Puts give you the right but not the obligation to sell a security at a preset price by a preset deadline.
Note that we’re talking about a risk-reduction approach here, not the kind of risk-taking—to try to amplify returns— that has been rampant in the options market . The simplest strategy could be to purchase a put option on a market-index exchange-traded fund, such as one based on the S&P 500. You could buy puts on individual stocks rather than an index ETF, but that may get expensive and complicated as each option carries a purchase premium.
Here’s how the ETF strategy would work: First, buy an option that would let you sell the ETF at a price below the current one, protecting you from declines beneath that level. You wouldn’t have to sell the ETF, and you wouldn’t even have to own it. As the S&P 500 falls, the put option gains in value, and you can sell it.
Say on April 16 you wanted to protect 100 shares of SPDR S&P 500 ETF Trust (SPY) from a decline of more than 10%. With the ETF trading at $505 a share, you could buy an option that covers 100 shares for $1,050, or $10.50 a share. You’re paying a premium equal to 2% of your position.
The option’s expiration date is December, and its strike price is $455 a share, or 10% below the current value. The strike price is the price at which you could exercise the option. But generally you sell the option rather than exercising it, so you don’t have to dump any shares, especially if you don’t own them.
If the market doesn’t go down 10% by December, you let the option expire worthless, and you’re out the $1,050 you paid for it. If the market drops more than 10%, you can sell your option at a profit whenever you want until December.
While it might be more lucrative to sell it early, Ablin recommends holding until expiration if you’re using the option to protect your portfolio. “Think of it like homeowner insurance,” he says. “You pay a premium, like a deductible for insurance, and your coverage runs for a term.”
Keeping the option until expiration extends your coverage for the longest possible period.
By using options, you don’t have to sell any of your stocks, which are typically the best asset to generate strong long-term returns. “If you have the wherewithal to hold the S&P 500 for 10 years, your odds of making money are over 90%,” Ablin says.
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