This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Economic Update
Regions Financial
Jan. 5: Total nonfarm employment rose by 216,000 jobs in December, ahead of expectations, with private-sector payrolls up by 164,000 jobs and public-sector payrolls up by 52,000 jobs.
Prior estimates of job growth in October and November were revised down by a net 71,000 jobs for the two-month period, with the net gain in private-sector payrolls revised down by 55,000 jobs. The household survey data show massive declines in both the size of the labor force and the level of household employment, both down by over 600,000 persons, which left the unemployment rate at 3.7%. Average hourly earnings were up by 0.4%, yielding a year-on-year increase of 4.1%.
While [these are] the numbers that analysts, market participants, and headline numbers will react to, here is what is, or at least should be, a much more relevant number: 49.4%. That is the response rate to the December establishment survey and is the lowest monthly response rate since January 1991.
We have been pointing out that response rates to the Bureau of Labor Statistics’ surveys have been significantly lower since the onset of the pandemic than had been the case prior to the pandemic. This lessens the reliability of the initial estimates of any metrics flowing from these surveys.
It is hard to say much about the state of the labor market when the reliability of the data is as lacking as we see it. Perhaps the most significant takeaway is that the slowing trend rate of job growth remains a function of less hiring, not more layoffs.
Richard F. Moody
Inflation Risks Rise
Strategy Report
BCA Research
Jan. 4: We agree with the consensus that a soft landing can be achieved but disagree that it can be maintained for very long. The reason is straightforward: When an economy reaches full employment, the central bank needs to calibrate monetary policy almost perfectly to keep it there. If it doesn’t cut rates fast enough, unemployment will increase; if it cuts too fast, inflation will rise.
Until December’s FOMC meeting, our strong bias was to think that the Fed would cut rates too slowly. However, in light of the apparent shift in the Fed’s reaction function and the resulting easing in financial conditions, the risk of a second inflation wave has gone up.
Peter Berezin and team
Negative “Santa Claus Rally”
U.S. Investment Policy Notes
CFRA
Jan. 3: The
S&P 500
jumped nearly 16% from the low on Oct. 27 through year-end 2023, notching gains of nearly 9% in November and 4.4% in December, and surging 24.2% for the entire year. The first two trading days of the new year saw the S&P 500 fall in price, however, as investors delayed locking in taxable gains. This selloff resulted in a negative “Santa Claus Rally” period, popularized by the Stock Trader’s Almanac, as the 500 slipped 0.9% during the final five trading days of 2023 and first two of 2024.
A negative seven-day period occurred 23% of the time since 1945, accompanied by a below-average calendar-year gain (4.7% versus 9.1% for all years), and frequency of advance (33% versus 71%). Though history is a guide and not gospel, it implies that 2024 may endure more challenges than anticipated at year-end 2023. CFRA still forecasts a good year to follow a great year, but sees elevated volatility along the way.
Sam Stovall
And the Winner Was…Energy!
Market Commentary
Cresset
Jan. 3: Compared to other markets, megacap tech did relatively well [in 2022-23], but not as well as 2023 might have suggested. In fact, the Magnificent Seven matched the returns of the broader technology sector over the 24-month span. The biggest winner over the past two years wasn’t Big Tech but rather the energy sector, which surged more than 63%, although most of its return was front-loaded in 2022. Energy shares limped in 2023, losing 1.4% for the year.
Jack Ablin
Political Pressure on the Fed?
Portfolio Review
Adrian Day Asset Management
Dec. 31: The Federal Reserve’s pivot is clear. In September, a majority of Fed members, in their famous “dot plot,” were calling for another rate hike in 2023 and some were calling for more hikes in 2024, while the weighted average forecast for rates this coming year was 5.2%. The rate hike didn’t come, and by December no members were seeing a hike this coming year, with the median forecast for 2024 rates of 4.6%.
For 2025, the forecast is for 3.6% and down from there. That’s a dramatic shift, and in his press conference following the December Fed meeting, Chairman Jerome Powell took no pains to moderate the conclusions of the dot plot, but instead indicated rate hiking was over and cuts lay ahead.
What caused the change? It would be difficult to argue that economic reports between September and December demanded such a change in policy. A pause, to allow the impact of tightening to play out, as Powell had discussed, would be justified, but not the dramatic reversal of policy. There are only two reasonable explanations: One, the Fed has additional intelligence of a sharp deterioration coming in the economy; and two, political pressure was exerted.
We don’t give much credence to the first, since the Fed’s economic forecasting has historically been quite dismal, although they are seeing the same reports as we. But after Powell at the beginning of December said, “It would be premature to speculate on when policy might ease,” he became subject to a constant barrage of political pressure, starting with President Biden saying recent jobs reports “should not encourage the Fed to raise rates,” a very unusual presidential intervention into interest-rate policy, and ending with Treasury Secretary Yellen appearing on CNBC literally minutes before Powell’s press conference in which she forecast inflation declining to 2%, adding that that meant rate cuts were now necessary.
Adrian Day
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