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Here's a Tale of Two Economies

We’re not here to tell you what you already know.

Our job is to tell you what to expect… To give you the heads up of what happens next.

And that ability comes from decades of experience.

Take today’s U.S. nonfarm payrolls report for instance.

In our Thursday morning Pre-Market Prep, we outlined that over the last 11 months, nonfarm payrolls have come in below expectations only once.

It’s been a hot, hot stretch for American job gains.

Well, after this morning’s release, we can update that to twice in the last 12 months.

Now, before we delve into what to expect… we do briefly have to touch on what you already know…

The U.S. economy added a mere 209,000 jobs in June. This was below the median forecast of 240,000. And also well short of the 497,000 that ADP reported 24 hours earlier.

Equities actually rose on this data.

Remember… bad news is good news. 

But here’s what you really need to know… 

Why This Jobs Report Was Unusual

If you paid attention to Thursday’s Pre-Market Prep, you know that the SPDR S&P 500 ETF (SPY) has ended jobs day higher five of the last eight times.

We provide that information for two reasons. One, to allow you to take today’s action in stride. But also, you could’ve prepared for a move into the green (that you knew was coming, but few others did).

Now, let’s tackle the burning question echoing across Wall Street…

I bet you’ve probably asked it yourself this morning: “What gives? Why such a disparity between the two monthly jobs reports?”

The reality is, this is far from the first time the two showed strikingly different figures. Particularly since the pandemic began in 2020.  

In fact, for much of the past year, the ADP employment report has been notoriously weaker than U.S. nonfarm payroll figures.

So, these two are prone to disparities. But our most significant ones were in January and June...

Why the difference?

That’s the interesting tidbit…

You see, basically, ADP pulls data from its own customers, representing 25 million workers. These are large enterprises… you have to be if you’re outsourcing payroll. 

On the other hand, U.S. nonfarm payrolls from the Bureau of Labor Statistics tend to focus on small businesses. Roughly 40% of the data comes from companies with 20 employees or less.

That means, when there are large discrepancies between the two – like in January and in June – they’re telling two very different tales. 

For example, in January, small, private companies were hiring at a furious pace. They didn’t see a recession. But large corporations held back. 

In June, this flipped. 

So large companies are feeling more optimistic after the best six-month start to the year in decades. Meanwhile, Main Street is on tenterhooks.

In either case, I see no reason to fear… yet. Subpar U.S. nonfarm payrolls are the bad news needed to push the Federal Reserve to stop raising rates. 

Here’s to high returns,

Matthew