By Tim Holland
Last week’s Weekly Wire turned to William Shakespeare — “A rose by any other name would smell as sweet” — to help make a point about tightening financial conditions. This week’s Weekly Wire turns to Winston Churchill — “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning” — to help make a point about the US labor market. Those famous lines were delivered by Prime Minister Churchill in late 1942 following British victories over Nazi Germany in North Africa, victories that followed years of setbacks and defeats for the British in World War II. The lines spoke to a possible inflection point in the war effort. Now, in no way are we trying to equate macroeconomic analysis with the desperate struggle to defend representative democracy against the forces of totalitarianism that was World War II, but we do think we are close to, or even at, an inflection point for the intensely tight, post-pandemic jobs market.
As we have written about of late, several data points indicate the US economy should weaken through the back half of the year, if not move into outright recession, including an inverted yield curve, the Conference Board Leading Economic Index, and consumer sentiment surveys. A meaningful outlier from a weakening data point perspective has been the robust US jobs market, characterized by a sub-4% unemployment rate, 305,000 new jobs created on average each month from September through February, and more than 10 million job openings since June 2021, per the JOLTS Job Openings Survey. Well, last week we learned that the JOLTS Job Openings Survey number for February came in at 9.93 million, below Wall Street’s estimate for 10.4 million vacancies, and the first sub-10 million job vacancy number since May 2021 (see chart). We do not want anyone to lose their job; unemployment takes too great a toll financially and emotionally on those out of work. But if the labor market is softening, it likely means inflation is biased lower and the Fed is closer to a rate cut than many expect.
Stay Invested, Stay Diversified, Stay Disciplined
By Rusty Vanneman, CMT, CFA, BFA
This year is off to a great start for investors. The January Effect first got the ball rolling, but other positive technical factors included the typical bounce after disappointing years in the markets plus the strong cyclical response after mid-term election years. That said, it was an even better quarter than might have been expected. We won’t argue. We’ll take it. Moving forward though, how much juice has been squeezed from this year’s prospective returns? As for what investors are thinking about, an industry-leading asset manager recently surveyed investors and found three major cohorts. First, participants still expect “sticky inflation” as the primary driver of market returns. They expect the Fed to still raise short-term interest rates, commodity prices to move higher, and for below-average equity returns. Next, investors are expecting a “recession” and below-average equity returns. They don’t expect the Federal Reserve to keep raising rates though, so bonds should do better in their view. The last major cohort was for “cycle extension”, where they expect continued strength in the US economy. The Fed is not expected to be the key factor here, but better than expected earnings growth is. The last cohort is the most optimistic on future stock market returns. How do we see it? We lean toward the more optimistic in terms of outlooks, especially for globally diversified portfolios, but we do recognize and will be watching the dark storm clouds on the horizon, especially the various clues that earnings growth may disappoint in the quarters ahead. Stay invested, stay diversified, and stay disciplined.