TEN Associates LLC

Labor markets continue to see gains, but is this yesterday’s news? Today's nonfarm payroll figure came in stronger than expected at 165,000 jobs gained in October, with upward revisions of 84,000 for the prior two months. The unemployment rate remained fairly steady at 4.1%. For some time, we've characterized the labor market as a period of "low hire/low fire" jobs growth, whereby firms are neither hiring many new workers nor laying many off. Indeed, average monthly jobs growth over the past 6- and 12-month periods has been 83,000 and 74,000, respectively. Today's stronger numbers are encouraging, but they need to be considered within the context of broader economic growth. Interestingly, we find ourselves in an environment where economic growth and labor market gains appear to be decoupling in profound ways. Real GDP growth accelerated to 3.4% in the third quarter, yet labor market gains have been more modest over the last several months. An outsized portion of the growth we're witnessing derives from capital expenditure related to the AI infrastructure buildout. Consider that investment in computers and peripheral equipment, representing just 2% of overall GDP, accounted for more than a third of GDP growth over the last 12 months. From a monetary policy standpoint, as long as we remain in this solid economic environment, with inflation running well above the Fed's 2% target, labor markets are unlikely to be top of mind for policymakers. Meanwhile, the profound AI investment cycle continues to drive broad economic and corporate earnings growth. Yet an increasingly concentrated group of companies is creating and capturing an outsized share of the benefits, leaving the broader equity market highly sensitive to changes in just a handful of names. In recent days, we've begun to see greater equity market volatility amid concerns over potential future regulation. Today's payroll data was interesting and confirmatory of an economy that has been operating at a breathtakingly strong pace. But it's also a comprehensive read on labor relative to yesterday's economic conditions. Markets today are much more focused on the future of AI spending, capital allocation and rebalancing activity, as well as how a new political framework will influence growth, fiscal conditions and the operating environment for different industries. How, then, should one position fixed income portfolios? In our view, the regime has shifted and fixed income yields reside at historically attractive levels. Real rates are positive across the globe, while the equity risk premium remains paper-thin and equity market concentration creates fragility and volatility that investors don't need to accept. We think a diversified, income-oriented portfolio can deliver equity-like returns today with dramatically less volatility, drawdown and concentration risk. Recent market activity seems to reinforce that view and we think that should continue well into 2027.