Stock investors are concerned that a ‘free-run’ economy could spell trouble. What are your future plans?.
The US stock market is pricing in a ‘soft landing’ scenario for the economy, but the explosive January jobs report, relatively strong corporate earnings and comments from Federal Reserve Bank Jerome Powell last week could point to the possibility of a ‘no landing’. . ,” where the economy is resilient as long as inflation remains on target.
This scenario could still be positive for U.S. stocks as long as inflation remains steady, according to Richard Flax, CIO at Moneyfarm. But the Fed may be hesitant to cut policy rates if inflation accelerates again, which could spell trouble, Flax said on the call.
What the past week tells us
Investors had their busiest week so far this year, with economic data and corporate earnings reports sending stocks closing at or near record highs.
The Dow Jones Industrial Average DJIA ended the week at its ninth record high for 2024, according to Dow Jones Market Data. The S&P 500 Index SPX recorded its seventh close this year on Friday, while the Nasdaq Composite COMP was about 2.7% below its all-time high.
As expected, the Federal Reserve froze its policy interest rate in the range of 5.25-5.5% at Wednesday’s meeting. But in a follow-up press conference, Federal Reserve Chairman Jerome Powell threw cold water on market expectations that the central bank could cut interest rates starting in March, emphasizing that he wanted “greater confidence” in easing inflation.
Former Federal Reserve Vice Chairman Roger Ferguson said Powell had introduced “a new kind of risk: no grounding.”
In an interview with CNBC on Thursday, Ferguson said inflation would stop falling as long as the economy remains strong. But Ferguson said he didn’t think that was a likely outcome.
Traders rated the odds of the Federal Reserve cutting interest rates at its March meeting at 20.5% on Friday, down from a more than 46% chance a week ago, according to the CME FedWatch tool. As of Friday, the likelihood that the Federal Reserve would begin a rate-cutting program in May was 58.6%.
Stronger-than-expected January employment data released on Friday further eliminates the possibility of a rate cut in March, Flax said.
The U.S. economy added a whopping 353,000 new jobs in January, with economists surveyed by the Wall Street Journal predicting an increase of 185,000 new jobs. Hourly wages rose 0.6% in January, the biggest increase in almost two years.
There was a lot of news last week, with several tech giants including Microsoft MSFT releasing earnings reports.
Apple AAPL,
when,
and Amazon AMZN,
Reported fourth quarter 2023 financial results.
Of the 220 S&P 500 companies that have reported earnings so far, 68% have beaten estimates, with earnings exceeding expectations by a median of 7%, analysts at Fundstrat said in a note Friday.
José Torres, chief economist at Interactive Brokers, said the tech giant’s reported earnings were “decent” but its guidance was not.
The rally in tech stocks since last year has largely been driven by the prospect of selling artificial intelligence (AI) products, but tech companies have not yet been able to capitalize on that trend, Torres said in a phone interview.
Adding to the headwinds are the reemergence of concerns surrounding community banks.
Shares of New York Community Bancorp Inc. on Thursday triggered the biggest decline in a community bank stock since the collapse of Silicon Valley Bank in March 2023. New York Community Bancorp Inc. on Wednesday posted a surprise loss and signaled a challenge for commercial real estate. An area where lending is problematic.
Meanwhile, the Federal Reserve’s bank term financing program, launched in March last year to strengthen the capacity of the banking system, expires on March 11.
Torres said that if the Fed starts cutting interest rates in March, “it will be like an ambulance burning down local banks.” “Now the ambulances will be arriving as early as May,” Torres said. “I think the period between now and May is a particularly dangerous time.”
What should investors do?
According to Torres, investors should start taking risks before May. “Commodities and raw materials helped alleviate inflation last year. If disinflation is to continue this year, services that can contribute will be needed. Then the unemployment rate should increase,” Torres said.
He said he prefers U.S. Treasury bonds with maturities of four years or less. This is because long-term government bonds can be vulnerable to risks associated with fiscal deficits and government borrowing. For stocks, he said, he prefers the healthcare, utilities, consumer staples and energy sectors.
Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. Slowing inflation and relatively strong economic data and earnings “don’t really paint a picture of a risk-off scenario,” he said. “The setup for risk assets remains biased toward optimistic expectations,” Buchanan added.
Over the coming week, investors will be watching ISM services sector data on Monday, the US trade deficit on Wednesday and weekly initial jobless claims on Thursday. Several Federal Reserve officials will also speak, potentially providing more clues about the trajectory of rate cuts.
