Key takeaways: 

  • Recent uncertainty around U.S. tariff policy after the SCOTUS decision compounds risk already in the market, which includes that from the labor market.
  • On its face, the January jobs report appeared strong, but the labor market is showing signs of concerning deterioration upon closer analysis.
  • Low hiring intentions, the buildup of long-term unemployment and the impact of AI are just some of the danger signs.
  • The questions become: What are the potential implications for the equity market and are investor portfolios prepared for them?

Before the Civil War, steamboat pilots on the Mississippi River faced a problem that no amount of experience could fully solve. The water was opaque. Silt-heavy and brown, the river revealed nothing of its bottom. Sandbars shifted overnight. Submerged trees, called snags, lurked invisibly below the surface and were the leading cause of steamboat destruction.

A pilot could not see the danger, so he learned to read indirect evidence: a faint ripple line that betrayed a reef, a change in the water’s color that hinted at depth, the subtle boil of current deflecting around an obstruction. When visibility failed entirely, a leadsman was stationed at the bow to cast a weighted line and call out the soundings. The call “mark twain” meant two fathoms, twelve feet of water. Safe passage, but with little room to spare.

The U.S. labor market data in early 2026 is that kind of murky water. The surface looks navigable, yet soundings may suggest otherwise.


The surface of the water 

The January 2026 Employment Situation report offered reasons for comfort. Nonfarm payrolls rose 130,000, nearly doubling the consensus estimate. The unemployment rate edged down to 4.3%, driven by the household survey, which posted a robust 528,000 gain. The U-6 underemployment rate dropped 0.4% to 8.0%. On its face, there was little cause for concern from this month’s headline data.
 

Depth finder 

However, within the same release, the Bureau of Labor Statistics (BLS) published its annual benchmark revision, which reconciles monthly survey data with actual employer state level filings. Total nonfarm employment for March 2025 was revised downward by 898,000 jobs. As a result, full-year 2025 employment growth estimates collapsed from 584,000 to just 181,000, an average monthly gain of roughly 15,000.

Forward looking data further reinforces the case for labor market deterioration. The December Job Opening and Labor Turnover Survey (JOLTS) report showed job openings falling to 6.5 million, the lowest since September 2020 and 708,000 below the Wall Street consensus estimates for the month. Beginning in November, the ratio of openings to unemployed workers has fallen below 1.0 for the first time since the pre-pandemic era.



Nothing else matters 

Meanwhile, layoffs are on the rise as planned hiring is plummeting. The Challenger Report showed 108,435 planned job cuts in January, up 118% year over year. Perhaps more concerning was the hiring data: planned new hires fell to 5,306, the lowest January since Challenger began tracking hiring plans in 2009. When companies stop planning to hire, any increase in separations flows directly into rising unemployment.

The stagnant job market is impacting the composition of unemployment. Long-term unemployment now accounts for 25% of all unemployed workers, up from 20% a year ago. Permanent job losers have risen to two million from 1.7 million. They are searching for new employment in a market where the hiring rate has essentially flatlined.


Is it different this time? 

Historically, unemployment does not rise modestly, plateau, and then reverse. Most often, it inflects upward and accelerates. Rising joblessness induces a reduction in consumer spending, roughly 70% of GDP, which lowers business revenue and prompts further layoffs.

Economists took note of this pattern. The Sahm Rule, developed by former Federal Reserve economist Claudia Sahm in 2019, signals that a recession has likely begun when the three-month average unemployment rate rises at least half a percentage point above its lowest reading in the prior twelve months. The rule was based on the observation that such a move in unemployment had preceded the onset of every recession since 1959 with two false positives when recessions followed six months later. The indicator breached its threshold in July 2024 at 0.53 percentage points, though Sahm herself cautioned at the time that unusual post-pandemic labor supply dynamics may have distorted the signal.

Market participants have developed several explanations for why the current labor market slowdown may not follow historical recessionary patterns. Reduced immigration has lowered the breakeven pace of job growth to roughly 20,000 - 50,000 per month, meaning the labor market can maintain a stable unemployment rate with far fewer monthly additions. Healthcare’s strong demographic tailwind continues to provide a structural employment floor, cushioning broader weakness. Meanwhile, the Federal Reserve retains meaningful policy flexibility with its current 3.50%–3.75% rate range, creating room to respond to further softening.

Snags below the surface 

Layered on top of current cyclical pressures is a rapidly emerging secular force that traditional indicators may struggle to capture. Artificial intelligence has reached the point where machine performance matches or exceeds human competence across a widening range of cognitive tasks. AI was cited in 7,624 of the January job cuts reported by the Challenger survey, about 7% of all announcements, and totaling nearly 80,000 since Challenger began tracking AI-related cuts in 2023. 

But direct attribution almost certainly understates the impact. AI’s most pervasive effect may not operate through layoffs at all, but through the quiet suppression of new hiring. A company deploying large language models for customer service or financial analysis does not necessarily terminate existing staff. 

It stops replacing departures and forgoes headcount additions as revenue grows. Anthropic’s CEO, Dario Amodei, has publicly warned that he believes AI could wipe out half of all entry-level white-collar jobs within the next one to five years, leading to a spike in unemployment to 10%-20%. 

Sector-level employment data may offer a clue. The information sector has shed jobs in nine of the last twelve months despite record hyperscaler capital spending. Computing infrastructure employment is declining as data center construction booms. Financial services have lost 49,000 positions since May 2025 as back-office automation accelerates. If AI compresses the timeline of white-collar productivity gains while decreasing employment options for displaced workers, the labor market’s traditional shock absorbers may prove insufficient.
 

Calling the soundings 

The pilots who navigated the Mississippi River did not trust the surface. They trusted the sounding line and the ripple patterns with an understanding that what they could not see was more dangerous than what they could.

Recent revisions in jobs data, a precipitous fall in job openings, the record-low hiring intentions, the buildup of long-term unemployment and the quiet displacement of cognitive work by artificial intelligence are the soundings available to us today. They do not guarantee the vessel will run aground, but they are collectively sending a warning signal – a warning signal that financial markets appear to be ignoring based on premium equity market valuations and tight credit spreads.

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ABOUT THE AUTHOR

James St. Aubin Chief Investment Officer (CIO) James St. Aubin, CFA®, CAIA®, is Chief Investment Officer for Ocean Park Asset Management. He has oversight of all Investment Management department activities, in collaboration with Co-founders David Wright and Kenneth Sleeper. An experienced investment management executive, his career of more than 20 years includes leadership roles in asset allocation, manager research and portfolio construction. James earned a Bachelor of Science in Finance from DePaul University and is a CFA® and CAIA® Charterholder.

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