The market will be focused on the next move by the FED. Today we have very important numbers that could influence the future moves of the FED. The jobs report and consumer confidence. To hot will cause the FED to keep rates higher for longer, to soft the economy could be on the brink of a recession. The stock market is bracing for a goldilocks economy in the current interest rate influenced economic slowdown.
The US stock market is focused today on the Jobs report with the expectation of 190k but came in at 199k. The jobless rate fell 3.7% compared to the 3.9% estimate. The stock market has been optimistic with more positive days than negative days over the last 5 weeks. The job participation rate is currently at 62.7 which is getting close to pre-pandemic levels. The jobs report is a key driver in the FED’s gauge of inflation with many economists predicting that the FED will not change course of higher for longer without a weaker jobs market. The jobs market continues to add new employment and proves a resilient economy.
Consumer confidence is strong with the average Christmas spending currently at $975 which is higher than the estimate of $937 and $100 higher than a year ago. Consumers are spending, which could be indicative of confidence in their jobs and spending more on credit cards. If the jobs market is weakening and the consumer has higher interest rates which will eventually cause a shift in consumer spending. This is exactly what the FED wants to see to get inflation under control and reverse course. The University of Michigan’s consumer confidence gauge will be released at 10:00 am EST.
The stock market is forward looking, and the market has stated by performance that it believes inflation is beginning to get under control. What the market is not looking for is too strong or too weak. This will factor into the perception that inflation is not under control, or the economy is weakening at a worse pace. Hot inflation bad, recession bad. We will be looking for the market to hit the bullseye, the goldilocks scenario.
The FED will not reverse course until they see a weaker economy which means fewer jobs and a consumer not spending so freely. Higher for longer or additional rate hikes is meant to break the consumer to not be spending so much. The stock market has anticipated this to be the case and hence the rapid accent of the stock market.
Next week, the focus will shift to the FED meeting and the debt ceiling debate. Although these are known issues of volatility, there is more certainty in the economy and the stock market. The optimism, although exuberant now, is the stock market saying that the uncertainties are becoming more certain. Investors and consumers have adjusted to the higher interest rates and the economy is still strong. However, we are also aware of the volatility of the changing economic data.
We will continue to focus on value stocks and dividends. Growth is becoming increasingly attractive but will only do so if the economy is bottoming out. Inflation needs to be put into check and the lagging effect of higher rates, which is lagging, needs to hit the consumer. Once we know this to be true, growth will become more of a better investment. Although it has been a wonderful month to be in growth, our focus remains on risk management. To Win, we don’t want to lose. Risk management is key to this strategy. History has numerous scenarios of over placed optimism with significant losses. A great return in dividends or interest is better than a massive correction in our portfolio.
It will be important to be patient and wait for opportunities to build new positions for the long-term. Cash preservation will be important moving into the near future.
Key points:
- Strong jobs report: 199k jobs added, unemployment rate fell to 3.7%.
- High consumer confidence: average Christmas spending of $975, exceeding estimates.
- Stock market optimistic, anticipating a “goldilocks” economy.
- Focus shifting to next week’s Fed meeting and debt ceiling debate.
- Optimism indicates increased certainty in the market, despite potential volatility.
- Fed’s path remains unclear because of positive economic data but slowing.
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