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What the Market?
Mr. Market has been spotted schmoozing and dancing to new Eurovision hits with Mr. Markets worldwide. Stock markets in the US, Europe, India, and Japan have been rallying and hitting have been reaching various new highs. The US stock market is up by more than 20% since the end of October and is 5% above highs set in January 2022. Strong market indicators and enthusiasm for AI have created long-term optimism but we’re still in early stages. Full blown excitement and financial ease is still a ways away (no appetite for IPOs, or M&A activity quite yet). This past week was all about the labor market and the outlook on wage inflation.
What’s driving the market?
When you lower your goals so you can show overachievement: Last week we got the US nonfarm-jobs report and while the total jobs added in February were 275,000, above the expected 200,000 job gains. However, last month's figure was revised sharply lower, going from 353,000 to 229,000, and the unemployment rate climbed notably higher, from 3.7% to 3.9%, now approaching its highest rate in two years.1 The nonfarm payrolls followed a weaker-than-forecast February ADP private-payrolls report, which showed a total of 140,000 jobs added, below expectations of 150,000.2
ISM Manufacturing and Services data were also released over the past week and showed a sharp pullback in the employment indexes, indicating contraction. These ISM data are comprehensive surveys of supply-management professionals and are generally considered leading indicators of both the manufacturing and services sectors of the economy.
For the manufacturing sector, the ISM Employment index contracted for the fifth month in a row, with 10 industries reporting a decrease in employment and four reporting employment growth in February. However, in the services sector, the ISM Employment index contracted for just the second time in three months, following six months of growth. There were nine industries reporting a decrease but six industries also reporting an increase, with some indicating they plan to increase hiring later in the year.
The JOLTS data for the month of January continued its trend of cooling as well. Total job openings moderated somewhat to 8.9 million, well below the highs of 12.2 million reached in March 2022. The quits rate, or the total number of workers voluntarily quitting their employment, also moderated to a near-term low of 2.1%. Job openings and the quits rate tend to be leading indicators of employment demand and wage growth, both of which may continue to moderate.
Total wage gains went from 4.5% year-over-year last month to 4.3%, and well below the recent peak of 5.9% in March 2022.
The ole I-F word is giving us the ole ole F word again...Inflation climbed 3.2 percent in the year through February. We don’t like this. The Consumer Price Index climbed 3.2 percent last month from a year earlier, up from 3.1 percent in January. It is down significantly from the 2022 high of 9.1% but still faster than the Fed’s 2% target (measured by the PCE index).3 As much as we want the Fed to be cutting rates, this is precisely why the Fed is going to take its time to ensure it doesn’t call an early win and cause chaos in the markets with everchanging rates. Though threading the needle of timing is one job we don’t envy.
What’s Next?
Have you ever chanted your buddy’s name to get them to do something? A keg stand? Perform? How about cut rates? Welp, if your buddy was ever Fed Chair Jerome Powell, he probably said something like…not yet but “not far”. Mr. Fed testified to Congress last week and stated that the Fed was “not far” from gaining the confidence it needs to begin cutting rates. The market is certainly showing signs of vitality and early strength. The softening in the job market is also a positive sign, in a utopian world 0% unemployment would be great but that’s not how economies work in our world. A constant balancing and rebalancing of supply and demand is what keeps our economy going ‘round. The slightly rising unemployment and cooling in hiring may be a signal that the labor market is on its way to a place of equilibrium and the gradual decline in wage growth could signal a cooling in services inflation. At 4.3% YoY, wage growth is still outpacing inflation, driving wage push inflation.
What’s an investor to do?
Overall, the market is looking stronger and while there is still volatility to come, the pullbacks can be considered more of buying opportunities vs bear cycles or prolonged corrections. Use pullbacks as buying opportunities, look at who has lagged the bull run, diversify from large caps for outsized gains.
Investment Strategy
Small to Mid-caps (Russell 2000 - index)
Semiconductors (AI play): Many have already experienced large booms. Look for the ones that have yet to spike, monitor for increasing trade volumes across semiconductors (use a stock filter with your brokerage and set up alerts on trade volumes). For a list of semiconductor companies look here. (SOXX - index) Disclosure: Lamp Capital is long on SOXL
The Curious Investor:
Reddit IPO + AI Features: Reddit announced the release of Reddit Pro, a suite of AI-powered tools that give businesses access to relevant trending topics and easily view their mentions in subreddits. Reddit aims to help businesses reach and connect with their audiences and eventually convert those businesses into paying ad customers. Reddit’s roughly $6.5 billion valuation makes it arguably the most highly anticipated IPO in 2024, as it prepares to begin trading on the NYSE at the end of March. In late February, Reddit gave Google access to its data for roughly $60 million so the search engine could train AI models on human posts. Unique data sets will be the differentiating factor as time goes on and Reddit is well positioned when it comes to proprietary data. AI tailwinds should help Reddit as it goes public - market participants are craving easier conduits to invest in the technology and Reddit's recent moves place them squarely in the arena.
Tik Tok, Time’s Up: Last week, a powerful House committee voted 50-0 to remove TikTok from U.S. app stores by Sept. 30 unless its Beijing-based parent company, ByteDance, sold its stake. President Biden said on Friday that he’d sign the bill if it reaches his desk — even as his campaign has embraced the platform. U.S. officials have warned for years that TikTok was a national security threat, and the vote followed a classified briefing on the risks the app poses to Americans. Even the White House appeared to support the effort, allowing National Security Council officials to help draft the measure even though
The blistering rally in cryptocurrencies has helped BlackRock’s Bitcoin E.T.F. to grow into a $10 billion behemoth, setting a record for exchange-traded funds. (FT)
President Biden will proposed a budget that raises taxes on businesses and the rich, and includes a raft of measures to combat high consumer costs. (NYT) Biden Taxes, Among the areas that could rankle business leaders: a call to raise the minimum tax on multinationals to 21 percent — a move that would seem to target pharmaceutical companies in particular. He also singled out “Big Oil, private jets, and massive executive pay” in his speech as areas ripe for boosting tax revenue.
Americans have just moved their clocks ahead for daylight saving time, but here’s a reminder that almost every state has tried to abolish it. (Business Insider)
There had been worries over real estate loans and internal controls, but New York Community Bancorp (NYCB) raised more than $1B on Wednesday from an investor group led by the firm of former Treasury Secretary Steven Mnuchin. It came along with an executive shakeup, including for Alessandro DiNello, who was named CEO only last week.
Climate reporting: The proposal had been pitched for years, but the SEC finally adopted new rules that will require many public companies to disclose climate-related risks in their financial statements and annual reports.
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This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. The postings on this site are our own and do not necessarily represent the postings, strategies or opinions of our employers.
FactSet
Mahajan, Mona. “Weekly Market Wrap.” Edward Jones, Edward Jones, 11 Mar. 2024, www.edwardjones.com/us-en/market-news-insights/stock-market-news/stock-market-weekly-update.
Smialek, Jeanna. “February Inflation Report: Consumer Price Increases Inch Higher.” The New York Times, The New York Times, 12 Mar. 2024, www.nytimes.com/live/2024/03/12/business/cpi-inflation-fed?campaign_id=60&emc=edit_na_20240312&instance_id=0&nl=breaking-news&ref=cta®i_id=170574032&segment_id=160539&user_id=9818c65041931a75822564d2c9d91ab3.