Last week the 9-week winning streak for the US stock market was snapped. The S&P lost less than 2% and the NASDAQ losses were nearly double that at less than 4%.  Losses were more about profit-taking in a new calendar year than any meaningful economic data.  That said, we did get the critical employment data last Friday. It revealed a still low 3.7% unemployment rate and more jobs were added than expected.  More on the labor market in a moment.

This coming week is full of important data.  It is the start of 4Q23 earnings season, particularly the large banks reporting at week’s end.  In short, expect a strong earnings season.  Currently, according to S&P Global Market Intelligence, year-over-year (YOY) operating earnings for the S&P 500 should be over +8%. This is an improvement over last quarter’s +3% YOY growth and the third straight quarter of growth.  Reported earnings are currently expected to grow 12%.

This week, we will also get inflation data, with both Consumer Price Index (CPI) and Producer Price Index (PPI) toward the end of the week too.  As for the former, the CPI is expected to be 3.2%, a slight uptick from last month.  Core CPI (removing food and energy prices) is expected to be 3.8% (down from 4.0%). 

As for what to expect moving forward, let’s talk about levels, trends and expectations.  This is what moves markets.  Defining these terms, “level” is where things are now relative to historical averages, “trend” is how that level has been changing, and “expectations” are what investors are expecting in terms of how “trends” might be changing.

For the economy, current levels do suggest a Goldilocks Economy.   GDP growth has been solid and is still expected to be just under 3% for the 4Q23.  Inflation, when looking at the 6-month rate of change for the Fed’s preferred inflation index, Personal Consumption Expenditure (PCE), is now below its ideal inflation target of 2%.  The level of the economy is strong.  That said, trends are more important than levels for moving markets.  When things are getting less bad, that’s typically good for the market. When things are getting less good, that’s generally not good for the markets. Here, the trend in inflation is supportive of the market.  

The economy, however, at least defined by the employment situation, is deteriorating.  First, let’s clearly state that the labor market is still strong. Unemployment is low by historical standards. Job openings are still historically high. The employee quit rate is high by historical averages, which also suggests labor market strength. The problem is that each of these numbers is now deteriorating. The trend here is clear.

These trends are why we believe investors are expecting sharply lower short-term interest rates, arguably the leading reason for market gains in recent months. According to the CME FedWatch Tool , the market is currently pricing an over a 50% chance now that the short-term rates drop over 1% by September 18th and a nearly 20% chance that that the short-term rates drop ~2% by December 18th.  If expectations change, however, for less rate cuts, that could put pressure on the market – even if earnings (the real reason why stocks go up over time) are the best they’ve been since early 2022.


Add it all up...


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The views expressed herein are exclusively those of Orion Portfolio Solutions, LLC d/b/a Brinker Capital Investments a registered investment advisor, and are not meant as investment advice and are subject to change.

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