07/10/2023 Market Strategy
Let the Sunshine In
But don’t forget the sunscreen
Key Takeaways
- This week’s market activity seems likely to revolve around a combination of economic data and earnings as the big banks report on Friday.
- Last week’s employment report showed a softening in jobs added compared to expectations and recent months.
- Market participants will focus on whether or not the Federal Reserve’s policy will push the economy into a recession.
- The ISM survey for manufacturers showed further weakening in June, indicating a divergence with the services index, which rose sharply.
- Most markets around the world sold off last week on concerns about economic growth, inflation, corporate earnings, and the effects of tight monetary policy.
The jobs gain for June released last Friday surprised to the downside with the number of jobs added 9% lower (209,000 vs. 230,000) than was forecast in Bloomberg’s survey of economists. In addition, the jobs gains for the two prior months were revised lower by 110,000. Stocks labored to digest the latest data and closed down on the day and for the week.
The question central to the angst reflected in market performance last week appeared to be: will the Fed have to get so aggressive this rate hike cycle that it will tip the economy into a mild or even a “hard landing” recession?
Central to the market’s machinations last week was what the June payrolls survey’s jobs, unemployment, and wage figures might portend for the Federal Reserve’s rate decision in July and even for the rest of the year.
In our view, the numbers were a mixed bag. They showed fewer jobs added and wage increases beginning to outpace the rate of inflation. In our view, such a result is not atypical in a period of economic transition amid a rate hike cycle.
In our view, it’s important to note that for all the weight granted to it in last Friday’s market action, the monthly jobs number often (especially in times of economic transition and uncertainty) can vary substantially from month to month and on the day, with market participants over-reacting, resulting in the proverbial “noise canceling the signal.”
The thought that the Fed may have to raise rates in July and perhaps one more time before year-end is not a surprise to us. We never have subscribed to expectations held by some that the central bank was on the verge of a long term pause or a rate cut this year. The levels of inflation reached last year and the stickiness inflation has exhibited so far this year preclude in our view the likelihood of either a long pause or a rate cut until 2024.
For now, the resilience of the economy particularly that shown by the consumer, new home sales, and leisure travel suggests that the Fed has more work to do before calling an end to the current rate hike cycle. Signs of slowing are to be expected as a result of the 10 hikes since early last year through May of this year. We take the slowing thus far as a sign that the Fed is having some success in curbing the pace of inflation even as monetary policymakers have shown a high degree of sensitivity for the effects of its actions on the economy.
To be sure, inflation’s stickiness remains a problem for the Fed to contend with. The central bank’s progress, with 10 rate hikes and a “skip” thus far, suggests to us that it will wait until 2024 to take a longer pause to the hike cycle or perhaps even consider a rate cut. Time will tell.
We believe that we are in the late innings of the Fed’s hike cycle. Investors in our view should right-size expectations and practice prudent diversification and exercise patience in tending their portfolios.
The Week Ahead
With the June jobs report in the rearview mirror, investors this week will be focused on a brace of key stateside economic data and S&P 500 Q2 revenue and earnings. Earnings season gets unofficially under way this week when several of the largest US banks report results on Friday. In addition to the big banks, a number of widely followed companies in the consumer discretionary, consumer staples, industrials and health care sectors will report results.
With consensus forecasts suggesting S&P 500 earnings for Q2 could fall 6.8% year over year, market participants will be looking for positive surprises and favorable guidance on a day to day basis.
Last week’s move to the downside reminded us that the market has tended to move lower ahead of earnings season and has shown a tendency to bounce between gains and losses from day to day on results until the season has had a chance to provide some clarity to the bigger picture and the direction markets are likely to take in the weeks and months ahead.
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