Oh, what a difference a few simple words can make.
“The disinflationary process has begun,” Federal Reserve Chairman Jerome Powell said at a Wednesday press conference, and with that the stock market took off, as investors priced a lower peak for the federal funds rate and higher odds. of rate cuts in the second half of 2023. Even unimpressive earnings reports from big tech companies and a scorching jobs report on Friday failed to dent the rally.
For the week, the
increased by 1.6%, the
Dow Jones Industrial Average
slipped 0.2% and the
he defeated them all with a 3.3% increase. It is on the brink of entering a bull market, up nearly 20% from its December 28 low.
One thing the jobs data confirms is that it’s hard to see a recession no matter how much you squint. Friday morning’s release showed that the US economy added 517,000 seasonally adjusted nonfarm jobs in January, more than doubling the job growth forecast by economists. The unemployment rate at 3.4% is at an almost 54-year low. Even so, average hourly wages increased 4.4% year-over-year, slower than the 4.8% increase seen in December. This is a promising sign that wage growth can slow without widespread job losses and an economic slowdown.
There is still a big disconnect in the logic of the market. If the job market and economy hold up, the Fed probably wouldn’t feel inclined to lower interest rates in the second half of 2023, as futures prices imply. It may take a real deterioration in economic data to prompt central bank action. In other words, it’s hard to see a scenario other than rates staying higher for longer – boosting bond yields and putting pressure on equity valuations – or disappointing growth, dragging earnings down.
Don’t tell the market. Right now, all he sees is easing financial conditions, an economy in good shape, and moderate inflation. So much so that the year-to-date rally has been driven solely by optimism in the form of expanding valuation multiples. The price-earnings ratio of the S&P 500 is up 8% this year, even as earnings expectations are down 1%. The mood is decidedly risk-on, and more so: small-caps are outperforming the bigs, and growth is beating value. THE
the exchange-traded fund (ticker: ARKK) is up 42% in 2023.
Investors have to be discerning, says Evan Brown, head of multi-asset strategy at UBS Asset Management. He entered 2023 expecting no recession, pointing to the strength of the US labor market, improving conditions in Europe and China, and US consumers and businesses that are less sensitive to interest rates than they were a decade ago. His prediction is not for meteoric growth, but for a global economy that just hangs on.
Brown expects the Fed to suspend rate hikes in the coming months and keep interest rates higher for longer. This should keep the S&P 500 P/E multiple in check and favor value-oriented stocks. The big picture leaves Brown not quite bullish, not quite bearish, at least as far as the index level is concerned. “You’d better pick your seats,” he says.
Wherever they are.
Write to Nicholas Jasinski at [email protected]