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How the September jobs report can spook the Fed

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Julie Biel, Portfolio Manager at Kayne Anderson Rudnick, Yahoo Finance Live to discuss the outlook for the labor force, expectations for the September jobs report, and corporate taxes.

Video Transcript

JARED BLIKRE: But we're going to bring in now Julie Biel, portfolio manager at Kayne Anderson Rudnick. And we got some numbers this morning, jobless claims. The weekly number came in at the second lowest level since the pandemic. And also, we got the ADP numbers on Wednesday. Those surprised to the upside. I'm looking at 568,000 private payrolls. What should we be expecting for tomorrow's big numbers?

JULIE BIEL: You know, I think we're all optimistic that as the increased unemployment benefits roll off, that labor force participation would improve. And I think some of it will have. But I think it's going to be uneven because for many working moms at home, it's still unclear if schools are really going to stay open or daycares are really going to stay open. They're having staffing shortages. So I think that's going to be a headwind for labor force participation and employment overall.

ALEXIS CHRISTOFOROUS: What are you going to be looking at in particular? We were talking earlier with an economist at ADP about the wage component of that report and how important that might be to the Federal Reserve and its timing on raising interest rates. What are your thoughts?

JULIE BIEL: Yeah, I think the wages is a very critical component. Understanding the VIX is important as well, right, where the shortages are. Are we seeing wage increases there? It's pretty broad-based. I think the increase in wages and overall, for the long-term health of the economy, that's a positive. But it has to give the Fed some pause in terms of inflation expectations going forward.

JARED BLIKRE: Well, then that leads to the natural question, which levels really give the market some pause here? Because handicapping what the Fed might perceive as inflation numbers, you know, wage inflation numbers that are too high, which way could this report go that would really spook the Fed and therefore the markets?

JULIE BIEL: Well, you know, it could go any number of ways, where the Fed has to be thoughtful in terms of managing growth expectations versus exposing us to risk of inflation. And so, you know, generally speaking, for the last few years, the worse the economic news was, the better the market reacted because it meant the Fed wasn't going to pull the punchbowl away.

But now we're getting into a place where we may have weaker economic growth, higher inflation. And that could be problematic for the Fed. They're really kind of painted into a corner of wanting to control inflation, but also being aware that the delta variant is having an effect on the economy. So it's a tricky position for them to be in.

ALEXIS CHRISTOFOROUS: And what do you think would be a Goldilocks report for the stock market tomorrow? What would invest-- what would make investors happy?

JULIE BIEL: It's hard to know what makes investors happy. Generally speaking--

JARED BLIKRE: They're fickle.

JULIE BIEL: Right. You know, I think people want to continue to see gains. I think that's-- people are more fixated on the jobs created more than anything else. I think the wage is more important for people who are worried about inflation. And I think it just depends what kind of an investor you are.

If you're a long-term investor like we are at Kayne, for us, seeing modest wage inflation is a positive because if you think about the US economy, it's primarily a consumer economy. And we know we have growing inequality. And so that is a positive for the economy longer term. But it does-- it is a negative for profitable-- profit margins, which have been at all-time highs.

ALEXIS CHRISTOFOROUS: Yeah, Julie, I want to switch gears and step away from the jobs report because we got some breaking news regarding corporate taxes and would love to get your reaction. So the Wall Street Journal is reporting that Ireland has decided to join a deal for a global minimum corporate tax rate. We know that Ireland is a low based tax country. It's seen as a tax haven for lots of multinational corporations. It's been a long time holdout with regards to joining this deal. What might the implications be, do you think, for some of these multinationals?

JULIE BIEL: You know, I think everyone has been aware that there would be much more coordination between international economies on taxation. They have to, right, considering the amount of stimulus that's been poured into the global economy. Everyone is aware that we can't keep having little pockets of places where people hide out to avoid taxes. So I actually think that this was actually pretty well understood by investors. I think we've all known that corporate taxes are probably going to have an increase.

And the decline in corporate taxes that we saw previously under the Trump administration, it didn't have quite as much of an outsized benefit to the economy or even the stock market, as everyone assumed it would. So I don't think it's a huge problem. I don't think what people are raising is massively different than where we're at. But it's something to keep in mind for sure.

JARED BLIKRE: But-- and just kind of looking at the market action today, we're seeing a broad-based rally, which is nice to see. But we've also seen certain sectors and styles do perform better than others. And now we have a rising interest rate environment, where we've seen a lot of value names outperforming. Just wondering what you're seeing yourself as a portfolio manager in the markets.

JULIE BIEL: You know, because we are long-term holders, for us, we think that there is enough uncertainty into the balance of this year and even into next year that we really want to focus and be choosy on quality. It's really hard to predict exactly how the delta variant is going to play out, interest rates are going to play out.

So for us, the focus needs to be on businesses with very strong competitive positions, pricing power ideally, and those that are really differentiated with models that can do well, even if there is a slowdown in the economy or higher interest rates or complexity in supply chain. It's a tall ask for all management teams navigating right now. And that's why we think it's important to be very choosy.

JARED BLIKRE: Yeah, and we've been hearing that a lot from analysts and portfolio managers that you've got to have a strong balance sheet and a good business model in a rising interest rate environment. Thanks for that, Julie Biel, portfolio manager at Kayne Anderson Rudnick.