Anemic Labor Market and the End of Passive Money Flows

The weakening Labor Market is reducing the flow of passive dollars into the stock market. Both labor supply and labor demand are falling in tandem.

On the supply side, immigration into the US has dropped from an annual increase of around 2 million people per year since 2020, to effectively zero today. Also, demographics are playing a key role in the decline of labor supply. US population growth has slowed from over 1.8% per year post-WWII to just 0.5% today. The population is also aging. Estimates suggest that over 4.1 million Baby Boomers are reaching 65 annually, or over 11,200 per day, between 2024-2027. The Labor force participation rate (LFPR) was 58% post WWII; but then began to rise to 66% as baby boomers flooded into the job market. Between 1990-2008 the LFPR remained around 66%. However, it has been declining since then and is back to 62% today.

On the demand side, Artificial Intelligence is putting downward pressure on hiring. Estimates vary and range from 200-300 thousand job losses during 2025 alone. In addition, debt-laden economies grow more slowly and create fewer jobs. Rising interest rates also tend to depress growth and hiring. The US economy has seen the end of the 40-year bull market in bonds. Inflation has been above the 2% target for the past five years, and the massive $2 trillion annual deficits are adding to a $39 trillion National debt. This is pushing investors to demand a higher coupon rate on US debt, which acts as a depressant to business formation and growth.

When you add it all up, it has led—at least for now — to the end of employment growth in the US. Back in January of 2025, there were 170.7 million total American workers. Today, there are 170.4 million people employed. A reduced labor force means less money pouring into 401 (k) plans and into the stock market. That is the exact opposite dynamic of what has been happening in the last few decades.

The Following are Some of the Recent Salient Bullet Points You Need to be Aware of:

• The US spent $11.3 billion over just the first week of the war in Iran
• US home foreclosures rose for the 12th straight month in a row in February. Foreclosures are up 20% y/y
• The default rate on the $1.8 trillion private credit market has risen to 9.2%, higher than it was in the 2008 global financial crisis
• Q4 GDP growth revised down to 0.7% vs the est. of 1.4% and down sharply from Q3's growth rate of 4.4%
• The Fed under Jerome Powell printed $18 billion of base money supply last week alone.
• Inflation in January was up 3.1% on core PCE, the Fed's preferred metric, well above its 2% target. The headline figure increased by 2.8%--also nowhere near target. That inflation reading was measured before the war in Iran, which has subsequently caused the price of energy to spike by 40%, which means the headline reading will most likely be rising above the core
• The PPI for February rose by 3.4% y/y, and the core jumped by 3.9% y/y. The January readings were 2.9% on headline and 3.4% for the core. These stubborn and rising inflation numbers also reflect what was happening before the war began.
• Therefore, and of course, the Fed did not cut interest rates at its March meeting and will find it very difficult to lower rates for the foreseeable future. The reason: inflation is still well above target and has been so for the past 5 years. And the war in Iran is sending prices even further away from that 2% inflation goal. The fiscal and monetary stimulus that was scheduled for this year has been at least delayed if not abrogated.

Overlay this backdrop on top of the most expensive stock market in history and you see this danger is the most relevant metric TMC/GDP. The TMC of equities is now an incredible 220% of GDP. For reference, this measurement was about 50% between 1975-1990.

Some Thoughts on the War

There are two ways this war most likely gets resolved. The first has a very low probability of occurring. Iran agrees to hand over its 440kg of 60% enriched uranium and open the Strait of Hormuz in exchange for the US and Israel to stop the bombing. The problem is that both Israel and the US demand regime change in Iran. Hence, it is hard to imagine they will settle anytime soon for anything less than the evisceration of the Islamic Republican Guard Corps and the Ayatullahs’ regimen. The second and higher probability is that the war winds down over the next few weeks to a much-degraded scale, allowing the US and some of its allies to start escorting a small number of ships through the gulf, sending oil prices somewhat lower—not $60 per barrel but more like $80. The latter scenario is feasible and therefore prevents us from aggressively shorting the market at this point. However, we have hedges in place and have repositioned the portfolio to prosper during this temporary sojourn in stagflation.

Owning precious metals, energy, and defensive stocks, and shorting rate-sensitive stocks and bonds is how you prosper during periods of anemic economic growth and rising inflation. Stagflation makes it a very difficult investing environment. Stocks and bond prices tend to fall concurrently It is even worse when both stocks and bonds are in a bubble. 2022 was a great example of this, and so is what is happening right now. But you don’t have to be a passively managed pigeon. Actively managing through these cycles of inflation and deflation is a far better alternative than buy-and-hold holding your typical 60/40 portfolio mix.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check”  and Author of the book “The Coming Bond Market Collapse.”