10/07/2024 Market Strategy
The Way We Are Is Not the Way We Were
When the Latest Surprising Economic Data Bring Monetary Policy into Question, We Believe it Best to Be Patient and Not Jump to Conclusions.
Key Takeaways
- We argue that it’s best not to jump to conclusions on monetary policy based on the month’s surprisingly resilient jobs figure.
- Last week’s employment report showed the US economy resilient in September as 254,000 jobs were created, about 60% more than the median forecast in Bloomberg’s survey.
- The ISM surveys showed a sharp rise in services sector activity in September, with the purchasing manager index for services firms rising 6.6% on strong new orders. The manufacturer survey was flat in the month.
- This week brings data on consumer prices, with the CPI index expected to show a benign 0.1% rise. Excluding food and energy prices, the “core” index is expected to rise just 0.2% from Aug.
With the Fed having made its first rate cut on September 18, the markets are likely to be even more sensitive to economic data in the months and quarters ahead that can offer clues as to how many cuts are likely to follow and how deep and how soon they’ll occur.
Last week’s nonfarm payroll number should serve as a reminder to market participants that changes in Fed policy are not likely to come in a straight line but rather have the potential to come when the Fed feels rate cuts are justified rather than heartily desired by the denizens of Wall Street and Main Street.
Both bond market and stock market participants appeared caught by surprise last Friday by the gain of 254,000 jobs in the nonfarm payroll survey rather than the 145,000 median estimate in a widely followed survey of economists. Also unexpected were positive (upward) revisions to prior jobs numbers that helped offset earlier downward revisions that had roiled markets over the summer.
Bond prices fell last Friday and yields rose on concern among bond market traders that the latest job number suggested that the economy was running hotter than expected which could present a challenge to earlier expectations for more cuts sooner than later after the Fed cut its benchmark rate by 50 bps on September 18.
Stocks on the other hand took the high road last Friday in a rally that erased losses from earlier in the week for the broad market to close the session and the week higher – if modestly so.
Investors and traders in the stock market appeared to take the hotter than expected jobs gain along with upward revisions to prior months as a sign that the economy is remaining resilient even after the Fed delivered 11 rate hikes, 9 pauses, and just 1 rate cut since March of 22.
While we were surprised by the number of jobs that exceeded substantially the survey of economists taken ahead of the September jobs number, the fact that there was a surprise in the jobs number—either mixed or otherwise—did not surprise us.
The process of changing monetary policy is not a simple adjustment but rather a process that history tells us can be an uneven process with positive and negative surprises to be expected. The US economy which is the largest in the world is highly diverse and complex. Projecting its trajectory is no easy task particularly in the short term when the Fed is shifting policy.
In our view the good news is that the job market continues to show resilience that likely supports the Fed’s maintaining a highly thoughtful and sensitive course of action in unwinding the rate hike cycle that it initiated in March of 2022 to put untoward levels of inflation in check.
The fact that the Fed had made its first rate cut this cycle in September, in our view, is positive on a number of levels and particularly in that the market appears no longer to have to be “waiting for Godot.” This shift in policy signals, if not perfection, significant progress in cutting the pace of inflation and moving towards a normalization of the US economy at a sustainable pace of growth
This week investors will find a brace of economic data to ponder ranging from a gauge of small business optimism to mortgage applications, and data on hourly earnings, initial jobless and continuing claims as well as consumer sentiment.
Q3 Earnings Season Begins Friday
Beyond the economic data scheduled for release this week is the “unofficial” start to earnings season when the largest US financial institutions begin to report Q3 earnings results this Friday.
We expect investors to pay particular attention to the big banks this season for quarterly results and any guidance offered by their respective managements that could provide greater clarity into the health of the economy, what lies ahead and how it might affect stock prices. We remain positive on equities and maintain our 5900 target price for the S&P 500 by year end.
The Fed’s recent rate cut in September and likelihood for further cuts to be determined by the Fed on an as and if needed basis should provide support for the bullish market outlook to be further nurtured.
We believe it’s important for investors to keep expectations rightsized in an environment of economic transitioning, a normalization process for rates and watershed-like period of innovation in the current economic cycle and in the secular period (longer term).
Notwithstanding election year nervousness on policies intimated by either Presidential candidate, the tragedies inflicted on humanity and the horrendous damage from storms recently in the southeastern US as well as the elevation of geopolitical risk in the Middle East and Asia, the S&P 500’s closing price last Friday of 5751.07 suggests to us a bull market that persists bolstered by economic resilience supported by business and consumer activity with opportunity for stocks to move higher into year-end.
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