The Bureau of Labor Statistics (BLS) issued an extremely robust jobs report Friday 2/3 with an overall increase of 517,000 new jobs created for the month of January. Travel leisure, healthcare and government sectors led the gains with construction and manufacturing also adding a sizable number of new hires.
Under normal conditions, big jobs gains would be a positive for the economy-more consumers working = higher spending = higher revenues and earnings. Despite that typical scenario we are at a time economically that has the Federal Reserve increasing interest rates to reduce the inflationary pressures that built up post pandemic. Who wins in this scenario?
For the moment, the bulls are winning with the SP500 Stock index up 8% through Friday 2/3/23 and most bonds, treasuries, municipals & corporates up around 3% YTD. It appears that the bulls are ignoring the hawkish tone from Fed Chair Powell’s comments last Wednesday. Powell mentioned “ongoing rate increases” as well as other comments indicating less likelihood of rates deceases in the back half of 23, which many bulls are forecasting.
Another wild card for the financial markets is the ongoing weakness in earnings announcements and full year 2023 forecasts. And then there is a the most asked question will there be a recession? If so, will it mild or something more extreme? So, what can we make of all this?
The facts are inflation is coming down quickly, job growth continues to be robust, and pthe Fed is much closer to finishing its rate hike policy. While many strategists are pcalling for a re-test of the 3500 Oct. 12 low, we feel there is a good chance the lows for pthis cycle have been made. We will have a trading range of 3750-4200 on the SP500 till investors have clarity on Fed policy, actual 2023 quarterly earnings and the direction of the USD.
For now, we are maintaining neutral asset allocations but as always looking for high quality companies, with good cash flows and earnings prospects. We also favor management teams that share growing cash flows with stock buybacks and dividends.