Stick to the plan
What the Market? - Feb 05, 2024
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What the Market?
The Fed held rates steady indicating they will continue to wait before easing monetary policy. The Fed has to thread the needle of not holding on so long as to cause a recession and not be too early to declare victory and cause havoc in the markets. Mr. Market was not surprised by the results and is keeping calm and keeping on.
What’s driving the market?
Fed Meeting - gotta appreciate the friend that does what they say they’ll do: All eyes were on the Fed meeting this week. TL;DR, the Fed kept rates steady and later on 60 Minutes, Powell reassured that three rate moves are still expected in 2024. Powell, acknowledged that the US economy was performing well and that inflation has come down significantly in the last 12 months. Stable GDP growth against declining inflation is a good indicator that Fed’s measures are working without causing too much damage to the economy. Perhaps a soft landing is possible after-all
The Jobby Trees are blooming: While the Fed rate announcement produced no surprises, that wasn't the case for the latest jobs report. The economy added a whopping 353,000 payrolls in January, double the consensus estimate. This was the strongest monthly gain in more than a year and the second straight month above 330,000, which last occurred in the summer of 2022. The unemployment rate held steady at 3.7%, still just a shade above the 50-year low of 3.4%. Despite the outsized hiring gain, unemployment remained unchanged due to an increase in the labor force.1
The Fed and the Rates: Markets have been pricing in a rate-cut as early as March which can lead to some unwarranted optimism and growth (ala 2021’s nonsensical rise - though not as egregious). The Fed intends to hold rates a bit longer until there is further confidence that inflation has been curtailed. The Fed currently has one of the most difficult decisions to make, when to ease the restrictive monetary policy. Declaring victory too early can wreak havoc in the market (having to backtrack on rate cuts) but holding on too long can induce a recession. This is the epitome of being between a rock and a hard place. Expect volatility as we progress.
Just grab a Jobby off the Jobby tree: While the US is creating new jobs the average workweek actually shrank to 34.1 hours in January. In particular, non-salaried employees, especially those in retail, construction and the hospitality sectors, worked fewer hours, which probably ate into their pay, Bill Adams, an economist at Comerica Bank, said in a research note. On top of that, workers remain increasingly anxious about keeping their jobs and more are holding on, the Great Resignation is being followed by the great job HODL.2
What more does the Fed need to see? All-in-all, the jobs report was a good signal from a GDP perspective. The economy is breathing and doing generally well. Continued strength in the labor market lets the Fed know that consumers are doing all right even with slightly more depleted savings, however wages are still rising and that works against inflation so it is not surprising that the Fed is going to continue to hold out a bit longer on its restrictive monetary policy. It’s a tough juggling act, but we think a summer rate cut is more likely.
What’s an investor to do?
The economy is strengthening and building a positive trend. A growing economy and moderating inflation coupled with the possibility of a less restrictive Fed in the back half of the year provides an optimistic backdrop for the year. It will be a bumpy road, even with possible rate hikes in the back-half of the year it is likely there will be pullbacks. Don’t try to time the market, it may be time to build positions.
Specific Companies: It’s not a bad time to get back into the market or double down on blue chips, look for strong and stable companies whose values were cut in 2023 and have made adjustments to improve their margins (e.g., layoffs). Large caps are poised to benefit from the stabilizing and potentially less restrictive environment this year.
Broad Based Investments: ETFs are not a bad way to go this year as the market looks to recover and get back on a track of reasonable and moderate growth. Consider investing in the S&P 500, Nasdaq, VTI, or into semiconductors (SOXX, SOXL)
Keep an eye on the economy
Notable Earnings This Week:
Caterpillar, Chegg, Estee Lauder, NXP Semiconductors, Palantir, Fiserv, DuPont, Ford, SNAP, Disney, Apollo, Alibaba, SoftBank, Maersk
For a full list of upcoming earnings see here.
The Curious Investor:
Apple launches vision pro: Analysts say 180,000 units were sold before its official launch. Morgan Stanley forecasts that sales could reach up to four million annually over the next five years. Apple has reportedly filed 5,000 patents related to Vision Pro.
Yandex, which operates Russia’s most popular search engine, agreed to divest its operations in that country to a group of Russian investors for $5.2 billion. (FT)
Reddit has reportedly chosen the New York Stock Exchange as the home for its forthcoming stock listing. (WSJ)
Fraudsters used A.I.-generated video to pose as the C.F.O. of an unnamed multinational company, tricking a finance employee into paying them $25 million, according to Hong Kong police. (CNN Business)
What we’re vibing:
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