Covid-19 didn’t just bring volatility to the stock market, it also brought volatility to the labor market. The number of unemployed quadrupled from 5.7 million (3.5%) in February 2020 to 23.1 million (14.8%) in April 2020. Not surprisingly, the number of job openings decreased from 7.1 million to 4.6 million at that same time.

Fortunately, things rapidly improved. The number of unemployed has declined to 7.7 million (4.8%) and the number of job openings has jumped to 10.9 million. Having 3.2 million more openings than “unemployed” is the largest we’ve ever seen and the reason there have been headlines about staff shortages.

Another positive is the decline of the number of persons not in the labor force who want a job. That number went from 5 million to 10 million in two months, and back down to 6.0 million by September 2021.

By and large, the labor force is strong. One of the best metrics for employment/ unemployment is the “Employment-Population Ratio – 25-54 yrs.” This tracks the percentage of people aged 25-54 in the U.S. who have a job. This figure currently stands at 78%, down from 80.4% just prior to the pandemic but up from 69.6% in April 2020. There are about 130 million Americans in these prime working-age years. To get back to where we were before the pandemic, we’ll need another 3.2 million Americans to get hired.

On the wage side of things, the situation has actually improved. The average weekly earnings of all employees went from $980 in February 2020 to $1,074 last month. On an inflation adjusted basis that’s an increase of 3.9%, slightly more than offsetting the drop in employment.

That means on an inflation and population adjusted basis, a little more money is being paid in wages today as was before the pandemic. It’s hard to overstate how remarkable that is. In addition to the Federal Reserve’s efforts, the $5.3 trillion of fiscal stimulus from the Federal government has been effective at keeping the economy humming.

The strength of the labor market has consequences for the Federal Reserve and the stock market. With the labor market at or better than historical averages (and inflation running a bit hot) the Fed’s reason for its accommodative monetary policy is diminishing.

If these economic trends continue as expected, the Fed will soon reduce their $120 billion/month in bond purchases, then they will eliminate these purchases, and finally the Fed will start selling bonds back to the market. In the middle of that, the Fed will likely increase short-term interest rates. These actions pose headwinds for stock and bond returns. Since 1976, the global stock market has returned 10.6% annualized and the U.S. bond market has returned 7.1%. It’s unlikely we will continue to see these numbers from stocks and a certainty we won’t from bonds.