Jan 9, 2023

Stocks Rally on Hope Inflation Will Slow

Weekly Market Commentary

The U.S. Bureau of Labor Statistics reported another respectable employment number on Friday, illustrating that modest economic growth and a still-high number of job openings are boosting payrolls.

But it was a smaller-than-forecast rise in wages that caught the attention of investors, and stocks rallied.

First, nonfarm payrolls grew by 223,000 in December, and the unemployment rate fell to 3.5% in December from 3.6% in November. The jobless rate hasn’t strayed above the narrow range of 3.5% to 3.7% since March.

Payroll growth is moderating but remains solid. That’s not surprising given the high number of job openings, which makes finding a job easier.

As the chief economist for ADP pointed out last week, “The labor market is strong but fragmented, with hiring varying sharply by industry and business size. Business segments that hired aggressively in the first half of 2022 have slowed hiring and, in some cases, cut jobs in the last month of the year.”

So, some folks are doing well. Others, however, aren’t as sanguine.

Let’s turn to the wage component, which sparked the big rally on Friday.

Average hourly earnings rose by less than 0.3% in December, and there were significant downward revisions to October and November.

Here’s where things get tricky. Investors view economic data through a very narrow lens. They celebrated the slowdown in wage growth because smaller wage hikes put less upward pressure on inflation and could eventually reduce the need for Fed rate hikes.

Investors are rooting for a continued slowdown in wage growth and a loosening in the tight labor market but not an outright recession, which would hamper corporate profits.

Wages are still rising too quickly for the Fed’s comfort and aren’t compatible with its 2% annual inflation goal.

Workers, however, benefit from higher wages, as many have not kept pace with the spike in prices.

Bottom line

It’s just one report. Just as November’s wage data was too hot for investors, the downward revisions in December may or may not hold.

Still, shorter-term investors liked what they saw. Progress for investors occurs in inches, not yards, and stocks finished the week on an up note.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at info@fdpwm.com or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.

RELATED POSTS

Job Growth Blows Past Expectations

The U.S. Bureau of Labor Statistics reported that the economy added a whopping 254,000 jobs in September, about 100,000 more than economists surveyed by Bloomberg had projected. The unemployment rate, expected to hold steady at 4.2%, slipped to 4.1%.

A Fed Rate Cut and Your Mortgage Rate

A recent online advertisement from a major bank read, “The Fed just lowered interest rates. Could refinancing save you money?” There is an implicit assumption in the ad that the Fed’s half-percentage point rate reduction brought about a significant drop in mortgage rates shortly following the decision.

Boom – Fed Opts for 50

On Wednesday, the Federal Reserve announced a 50-basis point (bp, 1 bp = 0.01%) rate cut for the fed funds rate to 4.75 – 5.00%, its first reduction since 2020. The announcement marks the end of the most aggressive rate-hike cycle since 1980 when the Fed funds rate rose a whopping 11 percentage points (1,100 bps) in just 6 months.

A Green Light for the Fed – in Three Graphs

All indications point to a rate cut by the Federal Reserve this week. What’s behind the Fed’s rationale? Let’s look at three key metrics. Aided by lower gasoline prices and stable prices for consumer goods, the rate of inflation has slowed dramatically.

August Melt-Up Follows Brief Meltdown

Market pullbacks are to be expected. They are incorporated into the financial plan. But like an unexpected traffic jam, they are exceedingly difficult to predict. Early August was one such event. The turbulence began at the end of July in the wake of seemingly minor news—the U.S. BLS reported another rise in the unemployment rate, which forced some investors to re-evaluate their view of a recession.