Happily employed

Stocks had a mixed close on Friday as traders digested positive employment figures. Are they good for stocks or bad for stocks… investors were left wondering.

Wise and patient. It has been a while since I wrote about my beloved garden. If you have missed my installments in the past, I am fortunate to have a small, wooded area adjacent to my yard. Though it may appear to be slight at first glance, it is jampacked with many wonders one would only expect to find in a dense miles-wide forest. I consider myself lucky to have it and it has served my family well; my pets, my children, and now myself, as I draw inspiration from it. You may recall my love for the tall rows of beach grass in my yard and how I closely follow its green shoots in early spring through its elegant waving in the summer breeze. This weekend I noticed that my gardener prepared it for winter by cutting the browning blades down at their base. The cropped blades, now uninspiring, will give way to new life on the other side of the winter solstice, but not before the sun once again nears the northern hemisphere. For now, it lays fallow with what appears to be very little life. My heart always sinks a bit when I first notice the stunted blades. In the colder months, I turn my attention to ravens who mind the tree boughs for hawks which are rampant in the warmer months. I have grown to love the raven caws and have found the birds to be quite charming and indeed, quite intelligent. This early morning was a cold one, perhaps the coldest yet of the season. I was surely the only human awake as I hurriedly prepared my espresso. The machine buzzed loudly as it struggled to express the life-giving reduction. It is loud for 4:00 AM (just ask my wife). But over the racket, I heard something different. I heard what I thought to be the distinct cooing of an owl. I stopped and listened carefully, even putting off that first big gulp of caffeine. I wanted to be sure. I was rewarded with a nice long coo, and it was beautiful. The majestic hawks of my diminutive woods had given way to the wise owl.

Indeed, it appears so with the markets as well. The hawks are still circling, but their numbers appear to be dwindling. Instead, in their place are some wise owls who patiently search for movement on the forest floor. What those owls see is the complete undoing of the once-booming housing market, decreased manufacturing activity, weak financial markets, slowdowns in corporate revenue growth, an ongoing decline in consumer confidence, and some very early signs that inflation is starting to slow.  The hawks will have what may be their last chance to swoop down next week and exact a final definitive blow on inflation. Will it be another +75 basis-point move, or will it be a still effective +50 basis-point increase? The markets at this point seem to be expecting a +50 basis-point move which has provided a bit of fuel for the recent rise in equities. Last Friday, we learned that the labor market is still strong with a low unemployment rate, stronger than expected monthly job creation, and still-growing wages. The markets’ initial reaction was negative, as a strong labor market might give the Fed a pass for a bigger rate hike. Ultimately however, markets closed out the day above their session lows, which is a good sign. If indeed the US suffers a recession next year as many economists are starting to believe, strength in the labor market would ensure that the contraction would be a mild one. High unemployment leads to decreased demand for goods, which affects corporate earnings… and ultimately, your portfolio. Indeed, the Fed does follow what is known as the Philips Curve, which hypothesizes the inverse correlation between inflation and employment. That means that the Fed will be sensitive to low unemployment when they are fighting inflation. But wait, there can exist a world where we have low unemployment and low inflation. We had that for the several years that led up to the pandemic. We also had low interest rates.

Now that the Fed is being thoughtful about its next moves, investors should focus on economic health and the strength of their portfolio holdings. Both of those will be reliant on a strong labor force. High unemployment leads to less sales and fear of job losses decays consumer confidence which also leads to less sales. A slowing, but not completely stalled, economy with ebbing inflation could be the dream scenario we are all hoping for. Stay tuned and stay… wise.

FRIDAY’S MARKETS

Stocks had a mixed close on Friday after markets sold off in response to strong employment numbers but ultimately recovered later in the session. The S&P500 slipped by -0.12%, the Dow Jones Industrial Average gained +0.10%, the Nasdaq Composite Index gave up -0.18%, and the Russell 2000 Index advanced by +0.59%. Bonds gained and 10-year Treasury Note yields inched lower by -1 basis point to 3.48%. Cryptos climbed by +1.41% and Bitcoin lost -0.53%.

NEXT UP

• Durable Goods Orders (October) is expected to come in at +1.0% in line with prior estimates.
• ISM Services Index (Nov) may have pulled back to 53.4 from 54.4. Watch this one closely, the markets are focused on services which has been the driver of inflation in recent months.
• The week ahead: still some more earnings along with Producer Price Index / PPI and University of Michigan Sentiment. Check out the attached earnings and economics calendars for times and details. I provide these calendars every Monday and I highlight the important ones. Yellow means pay attention and orange means really, really pay attention.