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Visualized: The State of the U.S. Labor Market

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Visualized: The State of the U.S. Labor Market

Visualized: The State of the U.S. Labor Market

The last time the U.S. labor market was this strong was in 1969.

Unemployment fell to 3.3%, incomes were soaring to historic levels, and inflation was rising at a fast clip. Like today, the Federal Reserve was tightening monetary policy to stifle inflation. Yet much of the wage increases were washed out by rising consumer prices.

The above graphic looks at the industries driving today’s robust job market using data from the Bureau of Labor Statistics. Later, we look into the impact on inflation, and whether today’s market can be sustained.

What is Driving the U.S. Labor Market?

Broadly, service-led industries witnessed the highest share of job growth in January.

Still, as the table below shows, a key part of the services sector—leisure and hospitality employment—remains under pre-pandemic levels. A similar trend is seen in retail services.

Rank
IndustryJob Growth
Jan 2023
Job Growth
Since 2020
1Leisure and Hospitality128K-495K
2Education and Health
Services
105K361K
3Professional and Business
Services
82K1,475K
4Government74K-482K
5Retail Services30K-37K
6Construction25K276K
7Transportation and
Warehousing
23K955K
8Manufacturing19K214K
9Other Services18K-121K
10Wholesale Trade11K148K
11Financial Activities6K245K
12Mining and Logging2K-55K
13Utilities-1K8K
14Information-5K211K

Adding 1.5 million jobs since 2020 is professional and business services, the highest overall. This sector covers legal, accounting, veterinary, engineering and other specialized services.

We are also seeing strong gains in transportation and warehousing. Last year, the sector added an average of 23,000 jobs, totaling almost 955,000 over the course of the pandemic. Today, trucking jobs exceed 2019 levels and warehouse employment is roughly 50% higher.

Although manufacturing hasn’t seen the highest gains, the sector has one of the lowest unemployment rates across job sectors, at 2.4%. Yet the industry faces an acute labor shortage—if every skilled unemployed worker were to fill open job vacancies, a third of jobs in durable manufacturing would remain open.

Cooling Wage Growth

Despite rock-bottom unemployment numbers, wage growth is slowing. In January, it fell to 4.4% annually, down from a multi-decade high of 5.9% in March last year.

At the same time, wage growth falls below inflation by about 1%.

U.S. Wages and Inflation

Wage growth is carefully watched by the Federal Reserve. Typically, their annual wage growth target is 3.5% to be compatible with 2% inflation.

In the current environment, this wage growth trend serves as a double-edged sword. As wage growth slows, workers are less likely to see wages keep up with inflation. On the other hand, slower wage growth could help prevent inflation from rising in the first place—and interest rates from climbing higher.

Where is the Job Market Heading?

The question on everyone’s minds is whether today’s job market will stay resilient.

According to Fitch Ratings, slowing aggregate demand in response to higher interest rates will begin to weigh on the U.S. labor market, and the 517,000 new jobs created in January—three times the level expected by analysts— won’t last long.

Eventually, both higher borrowing costs and elevated compensation costs could weigh on corporate profits. On the other hand, the pandemic has changed the labor market. Relief legislation may continue to buoy the job market and workers may also remain scarce as people retire or leave for other reasons.

Given how unemployment serves as a lagging indicator, the material effects in the economy will likely appear before cracks begin to show in the U.S. labor market.

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Markets in a Minute

What is the Success Rate of Actively Managed Funds?

For actively managed funds, the odds of beating the market over the long run are like finding a needle in a haystack.

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Actively Managed Funds

What is the Success Rate of Actively Managed Funds?

Over a 20-year period, 95% of large-cap actively managed funds have underperformed their benchmark.

The above graphic shows the performance of actively managed funds across a range of fund types, using data from S&P Global via Charlie Bilello.

Missing the Mark: Actively Managed Funds

Several factors present headwinds to actively managed funds.

  • Trading costs: First, fund managers will trade more often than passive funds. These in turn incur costs, impacting returns.
  • Cash holdings: Additionally, many of these funds hold a cash allocation of about 5% or more to capture market opportunities. Unlike active funds, their passive counterparts are often fully invested. Cash holdings can have the opposite effect than intended—dragging on overall returns.
  • Fees: Active funds can charge up to 1-2% in investment manager fees while funds that tracked an index passively charged just 0.12% on average in 2022. These additional costs add up over time.

Below, we show how active funds increasingly underperform against their benchmark over each time period.

Fund Type1 Year
% Underperformed
5 Year
% Underperformed
10 Year
% Underperformed
20 Year
% Underperformed
All Large-Cap 51879195
All Small-Cap 57718994
Large-Cap Growth 74869698
Large-Cap Value 59698587
Small-Cap Growth 80598597
Small-Cap Value 41819192
Real Estate 88627487

As we can see, 51% of all large-cap active mutual funds underperformed in a one-year period. That compares to 41% of small-cap value funds, which had the best chance of outperforming the benchmark annually. Also, an eye-opening 88% of real estate funds underperformed.

For context, Warren Buffett’s firm Berkshire Hathaway has beat the S&P 500 two-thirds of the time. Even the world’s top stock pickers have a hard time beating the market’s returns.

2020 Market Crash: A Case Study

How about active funds’ performance during a crisis?

While the case for actively managed funds is often stronger during a market downturn, a 2020 study shows how they continued to underperform the index.

Overall, 74% of over 3,600 active funds with $4.9 trillion in assets did worse than the S&P 500 during the 2020 market plunge.

Stage of 2020 CycleTime Period% Underperforming S&P 500
CrisisFeb 20 - Apr 30, 202074.2
CrashFeb 20 - Mar 23, 202063.5
RecoveryMar 24 - Apr 30, 202055.8
Pre-CrisisOct 1 2019 - Jan 31, 202067.1

Source: NBER

In better news, roughly half underperformed through the recovery, the best out of any market condition that was studied.

The Bigger Impact

Of course, some actively managed funds outperform.

Still, choosing the top funds year after year can be challenging. Also note that active fund managers typically only run a portfolio for four and a half years on average before someone new takes over, making it difficult to stick with a star manager for very long.

As lower returns accumulate over time, the impact of investing in active mutual funds can be striking. If an investor had a $100,000 portfolio and paid 2% in costs every year for 25 years, they would lose about $170,000 to fees if it earned 6% annually.

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Markets in a Minute

Ranked: The Largest Bond Markets in the World

The global bond market stands at $133 trillion in value. Here are the major players in bond markets worldwide.

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The Largest Bond Markets in the World

The Largest Bond Markets in the World

In 2022, the global bond market totaled $133 trillion.

As one of the world’s largest capital markets, debt securities have grown sevenfold over the last 40 years. Fueling this growth are government and corporate debt sales across major economies and emerging markets. Over the last three years, China’s bond market has grown 13% annually.

Based on estimates from the Bank for International Statements, this graphic shows the largest bond markets in the world.

ℹ️ Total debt numbers here include both domestic and international debt securities in each particular country or region. BIS notes that international debt securities are issued outside the local market of the country where the borrower resides and cover eurobonds as well as foreign bonds, but exclude negotiable loans.

Ranked: The World’s Top Bond Markets

Valued at over $51 trillion, the U.S. has the largest bond market globally.

Government bonds made up the majority of its debt market, with over $26 trillion in securities outstanding. In 2022, the Federal government paid $534 billion in interest on this debt.

China is second, at 16% of the global total. Local commercial banks hold the greatest share of its outstanding bonds, while foreign ownership remains fairly low. Foreign interest in China’s bonds slowed in 2022 amid geopolitical tensions in Ukraine and lower yields.

Bond Market RankCountry / RegionTotal Debt OutstandingShare of Total Bond Market
1🇺🇸 U.S.$51.3T39%
2🇨🇳 China$20.9T16%
3🇯🇵 Japan$11.0T8%
4🇫🇷 France$4.4T3%
5🇬🇧 United Kingdom$4.3T3%
6🇨🇦 Canada$4.0T3%
7🇩🇪 Germany$3.7T3%
8🇮🇹 Italy$2.9T2%
9🇰🇾 Cayman Islands*$2.7T2%
10🇧🇷 Brazil*$2.4T2%
11🇰🇷 South Korea*$2.2T2%
12🇦🇺 Australia$2.2T2%
13🇳🇱 Netherlands$1.9T1%
14🇪🇸 Spain$1.9T1%
15🇮🇳 India*$1.3T1%
16🇮🇪 Ireland$1.0T1%
17🇲🇽 Mexico*$1.0T1%
18🇱🇺 Luxembourg$0.9T1%
19🇧🇪 Belgium$0.7T>1%
20🇷🇺 Russia*$0.7T>1%

*Represent countries where total debt securities were not reported by national authorities. These figures are the sum of domestic debt securities reported by national authorities and/or international debt securities compiled by BIS.
Data as of Q3 2022.

As the above table shows, Japan has the third biggest debt market. Japan’s central bank owns a massive share of its government bonds. Central bank ownership hit a record 50% as it tweaked its yield curve control policy that was introduced in 2016. The policy was designed to help boost inflation and prevent interest rates from falling. As inflation began to rise in 2022 and bond investors began selling, it had to increase its yield to spur demand and liquidity. The adjustment sent shockwaves through financial markets.

In Europe, France is home to the largest bond market at $4.4 trillion in total debt, surpassing the United Kingdom by roughly $150 billion.

Banks: A Major Buyer in Bond Markets

Like central banks around the world, commercial banks are key players in bond markets.

In fact, commercial banks are among the top three buyers of U.S. government debt. This is because commercial banks will reinvest client deposits into interest-bearing securities. These often include U.S. Treasuries, which are highly liquid and one of the safest assets globally.

As we can see in the chart below, the banking sector often surpasses an economy’s total GDP.

Banking Sector

As interest rates have risen sharply since 2022, the price of bonds has been pushed down, given their inverse relationship. This has raised questions about what type of bonds banks hold.

In the U.S., commercial banks hold $4.2 trillion in Treasury bonds and other government securities. For large U.S. banks, these holdings account for almost 24% of assets on average. They make up an average 15% of assets for small banks in 2023. Since mid-2022, small banks have reduced their bond holdings due to interest rate increases.

As higher rates reverberate across the banking system and wider economy, it may expose further strains on global bond markets which have expanded rapidly in an era of dovish monetary policy and ultra-low interest rates.

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