Stocks gained on Friday after the latest job numbers landed in the Goldilocks zone. In the US, the rate of unemployment ticked lower than expected while more jobs were created than economists’ were expecting – the economy is alive, and the Fed sees some results (albeit minor) from its tough monetary policy moves.
Breaking house is hard to do. Eloise arrived safely at Liberty International Airport on Friday, after a brief holdover at LAX. Her journey started in Utah the night before. That is an awful lot of ground to cover… for an 8-week-old puppy. That’s right, Eloise is a 2-pound Cavapoo (King Charles Cavalier and Poodle mix) puppy which my daughter has been eagerly awaiting for the better part of a year. Apparently, supply chain issues have affected dog breeding, as well. All joking aside, my daughter was very specific about the size, sex, markings, parents, etc. and indeed, so were many others, who queued up ahead of her. If you have ever had a puppy, you know what comes next… I mean the part after the 5-minute honeymoon in which you dig your nose into the new pup’s soft belly and get overly emotional.
ALSO, ON FRIDAY, the Department of Labor Statistics released its monthly employment report. The Fed has made it clear that it would like to see a decay in the job market before it would consider pulling back on its economic brake mashing. Though it seems oxymoronic that any agency of the US Government would like to see unemployment grow, the Fed has very little choice. It must sacrifice some strength in the labor market in order to bring runaway inflation in check. It seems unnatural and uncomfortable, but according to all the widely accepted economic theories, there is a direct relationship between tightness in the labor market and inflation. From the stock market’s perspective, high inflation and labor market tightness is not necessarily a bad thing, but an angry Fed and higher interest rates are a bad thing, and largely responsible for the poor performance of both stocks and bonds over the past 12 months. By now, we are all well-aware that in order for volatility in the markets to calm down and for any chance of stocks making meaningful gains, the Fed must cease its aggressive rate hiking. If you ask the Fed its intentions, you probably would not like the answer. Well, that actually did happen last week when the Fed announced that it raised interest rates by another +75 basis points. Though that part was largely expected, what was not was Chairman Powell’s comments that followed the policy release. That message was: rates are going higher, the Fed is not stopping, and rates will likely remain high for longer than expected. That was not the message the bulls were hoping for. Stocks sold off on the comments. Traders then trained their sights on Friday’s big jobs numbers and hoped for a poor showing. A decay in labor market strength could lead to a softer Fed policy. Unfortunately, the economic release offered no shelter, painting a picture of a still-healthy labor market. That may not be surprising to some given that in the week prior we learned from the JOLTS Job Openings release that there are still over 10 million vacancies waiting to get filled.
It was not a completely perfect bill of health for the labor market, however. The Unemployment Rate did, indeed tick up to 3.7% from 3.5%, higher than expected, and for further clarity the strong JOLTS number from a few weeks back was from September, as it is a lagging indicator. In this economy and market, lots can happen in a few weeks or even days, so if you are attempting to guess what the Fed may do in its next month’s meeting, be prepared to change your opinion often. I think that it is important to note that, in addition to the economic numbers, this quarter’s corporate earnings have been saturated with announcements of hiring freezes and layoffs. There has not been a single morning in recent weeks that I can recollect not reading about an S&P500 member announcing layoffs. Also, noteworthy in earnings season is the number of companies lowering full year guidance. As we are just about halfway through the final quarter of the year, companies, based on what they are seeing TODAY (not last quarter), they are lowering expectations for the quarter, and we should take note. In a competitive labor market, companies will only lay off employees if they are expecting real challenges in quarters ahead. In the old smoke and fire platitude, this is definitely smoke. Companies are experiencing weaker demand from consumers, likely due to higher borrowing costs decaying confidence. As unemployment continues to tick higher, that confidence will decline further.
Though Fed Funds futures relay that the markets are expecting another +50 basis-point hike for December and 25% change of another +75 basis-point bump, we can expect that to change materially, in either direction, in the weeks ahead. When the Fed meets on December 14th it will have to consider at minimum, weaker corporate earnings (earnings season is far from over), mid-term elections (HAPPENING THIS WEEK), 2 more CPI releases (one later this week), another monthly jobs number, 1 more PCE Deflator, 1 more Consumer Confidence number, 1 University of Michigan Sentiment indicator, another estimate of Gross Domestic Product, and another wave of PMI (purchasing managers indexes). For investors, we need to add in a full month of FOMC member speaking engagements. What this will all amount to is lots more volatility, during what is historically a good quarter for stocks. Emotions will be running high.
So, we collectively decided that prior to going to her new home, my daughter’s small apartment in Manhattan, we would begin to train Ella (her nickname) at our family home. The results so far are as follows: Eloise has a beautiful voice which carries effectively through our entire home (it takes on different qualities in the middle of the night), she does not find her crate as comforting as we would have hoped, her success rate of making it to her potty-pad for relief is not quite 100% (in fact, it’s probably less than 50%), we need more paper towels, and most importantly, SHE IS ABSOLUTELY ADORABLE and she will be an important part of our lives for many years to come… but, as with our stock portfolios, it is going to take a lot of patience in the months ahead. We know this from history, as I know this with Eloise… she is not the first family puppy to keep us awake at night.
WHAT’S SHAKIN’
Meta Platforms Inc (META) shares are higher by +3.43% in the premarket after the Wall Street Journal Announced that the company is planning to lay off “thousands.” This after Meta announced a big EPS miss in its Q3 announcement just last week. Potential average analyst target upside: +61.8%.
Berkshire Hathaway Inc (BRK/A, BRK/B) shares are higher by +1.35% in the premarket after it announced over the weekend that it lost money in Q3, though it beat on Revenues. Potential average analyst target upside: +22.1%.
Apple Inc (AAPL) shares are lower by -1.13% after it announced that it cut expected iPhone production numbers due to weaker demand and China lockdowns. The company announced a solid beat in the prior quarter 2 weeks ago. This latest news prompted some analysts to reconsider their price targets. Dividend yield: 0.66%. Potential average analyst target upside: +28.2%.
FRIDAY’S MARKETS
Stocks rallied into the close on Friday on a mixed employment report leaving stocks in the green for the day but in the red for the week. The S&P500 rose by +1.36%, the Dow Jones Industrial Average climbed by +1.26%, the Nasdaq Composite Index traded higher by +1.28%, and the Russell 2000 Index advanced by +1.13%. Bonds slipped and 10-year Treasury Note yields added +1 basis point to 4.15%. Cryptos gained +6.41% and Bitcoin ascended by +4.31%.
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