This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Job Market Contradictions
Article
ING
Feb. 2: January’s U.S. employment report is crazy strong. Payrolls surged by 353,000, versus consensus estimates of 185,000. Even the highest forecast of 300,000 was well shy of the outcome, especially when we add in the 126,000 of upward revisions to the past two months of data. The momentum in job creation is on the rise again….
However, we have to point out there are some less positive stories here. Nearly all the jobs the American economy is adding are part-time, and the average workweek fell to 34.1 hours—that is recession territory! Note that while the number of unemployed fell, the household survey showed employment falling 31,000.
Moreover, labor market surveys are far, far weaker, with both the ISM manufacturing and services sector surveys in contraction territory, indicating job shedding. We will be closely watching the ISM services employment index update on Monday. It collapsed in January, and if it doesn’t dramatically rebound, then we would be worried that payrolls could soon start to roll over. Note, too, that yesterday’s NFIB hiring-intentions survey was weak. Payroll numbers can’t keep running at 300,000-plus, given these data.
So, as is the case in so much of the U.S. data flow, there are huge contradictions between data releases and even within data releases. There will be no March interest-rate cut (barring a return of financial-system stress), but we are sticking with the May rate-cut call, with 150 basis points of cuts this year and 100 basis points in 2025.
James Knightley
Is 2% the New Neutral?
US Watch – Quick Insights
TS Lombard
Feb. 2: Is an interest-rate hike next? The short answer is no, but after the January employment report and upward revisions [to prior months’ reports], the question is worth pondering, based on the idea that sustained growth lays waste to the Fed’s ardent defense of 50 basis points [half a percentage point] as the neutral real funds rate. If we raise the neutral rate back to 2%, the longtime normal and what forward markets anticipate two years out, then 5.5% is spot-on if one assumes 4% is NAIRU [the nonaccelerating inflation rate of unemployment]. Should inflation start to rise, the NAIRU presumption likely needs to change. Raise it to 4.5% and the target funds rate jumps to 6.2%.
All of which is to say that the market pushing out the first cut to June (86%) is probably right, for the moment, but not if inflation pops back over 4%.
Steven Blitz
’24 Could Be Biotech’s Year
Uncommon Sense
State Street Global Advisors
Feb. 1: The
S&P Biotechnology Select Industry Index
trailed the
S&P 500
by 18.5% last year. This poor relative performance led to $3.1 billion in outflows from biotech exchange-traded funds in 2023….
The bad news for biotech creates an investment opportunity with a compelling valuation. Expectations for Federal Reserve rate cuts and falling interest rates should boost the value of biotech’s future earnings.
Improved market conditions, pent-up supply and demand for deals, and pressing strategic needs for companies to transform their business models will result in an increase in merger-and-acquisition activity, according to PwC. Large pharmaceutical companies pursuing midsize biotech targets to fill drug-pipeline gaps, strong investor interest around diabetes and weight-loss GLP-1 drugs, and a continued focus on precision medicine also are likely to fuel M&A activity this year….
Perhaps biotech companies will exceed modest analyst earnings expectations this year, further supporting the stocks. I predict that the S&P Biotechnology Select Industry Index will outperform the S&P 500 in 2024.
Michael Arone
New S&P 500 Target
U.S. Investment Policy Notes
CFRA
Jan. 31: CFRA has increased its 12-month target for the S&P 500 to 5,250 from the 4940 level established in early December. This new target indicates a near-7% price appreciation potential over the coming 12 months and implies a 2024 year-end level of 5200. This revised target reflects fundamental, technical, and historical factors.
From a fundamental perspective, it incorporates the market-cap weighting of CFRA equity analysts’ price appreciation projections for the stocks within the S&P 500. Point and figure targets for these stocks then serve as the technical overlay. Finally, history offers guidance associated with traditionally encouraging returns during second years of bull markets and the benefits of a soon-to-be-initiated rate-easing cycle, as well as returns during presidential election years. It also includes the likelihood of a digestion of gains typically averaging 8%, following the recouping of all that was lost in the prior bear market.
Sam Stovall
Don’t Chase VIP Stocks
BTIG Technical Strategy
BTIG
Jan. 30: The “most important” stocks for hedge funds, and for a lot of market participants, are about as extended on a daily basis as they have been over the past two decades. The Goldman Sachs Hedge Fund VIP Index is also coming into significant overhead supply from its late-2021 highs. In the five previous occurrences when daily RSI [relative strength index] closed above 81, three were within 1% of the final high for the move.
The other two (Dec. ’19 and Jan. ’20) saw decent upside, but then a massive decline due to Covid. We can argue about what “would have happened” if there wasn’t Covid, but there were many other warning signs at that point, including breadth and momentum divergences. As we enter the heart of earnings season, along with a significant amount of macro, we would be cautious in chasing extended names. The risk of an unwind, either during or after these events, remains quite high.
Jonathan Krinsky
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