U.S. stock markets are pricing in a “soft landing” scenario for the economy, despite strong January jobs numbers, relatively strong corporate earnings, and the Fed's Jerome Powell over the past week. This comment may indicate the possibility of a “non-landing”. ”, if the economy is resilient while inflation remains on target.
Richard Flax, chief investment officer at Moneyfirm, said such a scenario could still be positive for U.S. stocks as long as inflation remains stable. But Mr. Flax said on the conference call that if inflation picks up again, the Fed may be reluctant to cut rates significantly, which could create problems.
What the past week has told us
Stocks just finished at or near record highs as investors searched for economic data and company earnings reports from their busiest week so far this year.
The Dow Jones Industrial Average DJIA ended the week with its ninth record closing price of 2024, according to Dow Jones Market Data. The S&P 500 Index SPX hit a record high Friday for the seventh time this year, while the Nasdaq Composite Index is down about 2.7% from its all-time high.
The Fed kept interest rates unchanged at 5.25% to 5.5% at Wednesday's meeting, as expected. But Fed Chairman Jerome Powell, in a subsequent press conference, poured cold water on market expectations that the central bank could start cutting key interest rates in March, calling for “further confidence” in curbing inflation. He emphasized that there is.
Former Fed Vice Chairman Roger Ferguson said Mr. Powell introduced “a new kind of risk: the risk of being grounded.”
Mr. Ferguson said in an interview with CNBC on Thursday that in that scenario, the economy would remain strong and inflation would stop falling. But Mr. Ferguson said he doesn't think that's a likely outcome.
Traders on Friday were pricing in a 20.5% chance the Fed would cut interest rates at its March meeting, down from more than 46% a week ago, according to the CME FedWatch tool. The probability that the Fed will begin a rate-cutting program in May was 58.6% as of Friday.
Flux said Friday's better-than-expected January jobs report made a March rate cut more likely.
The U.S. economy added a whopping 353,000 new jobs in January, compared to economists compiled by The Wall Street Journal who expected the number to increase by 185,000. Hourly wages rose 0.6% in January, the largest increase in about two years.
Last week was also full of earnings reports from several tech giants, including Microsoft.
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apple
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and amazon
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reported financial results for the fourth quarter of 2023.
Analysts at Fundstrat said in a note Friday that 68% of the 220 S&P 500 companies that have reported results so far beat expectations, with a median profit of 7% above expectations.
Jose Torres, senior economist at Interactive Brokers, said that while the big tech companies' earnings reports were “okay,” their guidance was not.
The rally in tech stocks since last year has been driven primarily by the outlook for sales of artificial intelligence products, but tech companies have yet to monetize this trend, Torres said in a phone interview.
Adding to the headwinds is the resurgence of concerns regarding regional banks.
New York Community Bancorp's stock price on Thursday led to the biggest decline in local bank stocks since the March 2023 Silicon Valley bank failure. On Wednesday, New York Community Bancorp reported an unexpected loss, hinting at challenges in commercial real estate, a sector with lending problems.
Meanwhile, the Fed's bank-term funding program, launched last March to strengthen the capacity of the banking system, expires on March 11.
If the Fed is able to start lowering its key interest rates in March, it would “be like an ambulance picking up local banks and saving them,” Torres said. “Right now, we won't see an ambulance until May at the earliest. I think we're in a particularly dangerous period from now until May,” Torres said.
What should investors do?
Investors should risk-off by May, Torres said. “Goods and goods helped a lot with disinflation last year. If disinflation is to continue this year, we will need services that contribute to it. That will require an increase in the unemployment rate.” Torres said.
He said he prefers U.S. Treasuries with remaining maturities of four years or less because long-term bonds can be more sensitive to risks surrounding budget deficits and government borrowing. For his stocks, he said he prefers the healthcare, utilities, consumer staples and energy sectors.
Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. He said slower inflation and relatively strong economic data and earnings “do not paint a concrete picture of a risk-off scenario.” “Risk asset pricing remains tilted toward bullish expectations,” Buchanan added.
Over the coming week, investors will focus on Monday's ISM services sector data, Wednesday's US trade deficit, and Thursday's weekly new jobless claims numbers. Several Fed officials are also scheduled to speak, which could provide further clues about a potential rate cut.
