Alphabet advances in the artificial brain battle

Stocks declined for a third straight session as cooling down traders await tomorrow’s big numbers and next week’s FOMC meeting. ADP employment figures show that the Fed’s good work is… working good… correction, well.

Cleared for landing. In just a day or so we will get the highly anticipated monthly employment report from the Bureau of Labor Statistics. I got a little nerdy earlier in the week and showed you a snapshot of the famous Phillips Curve which is behind the Fed’s strong desire to maim the strong labor market with its interest rate hiking. According to the theories behind the strategy, a tight (or strong) labor market sparks inflation, a vice versa. So, it is that “vice versa” that the Fed, and the rest of us are looking for.

There is more than one way to stop an automobile from moving too fast. The surest method is to crash it head-on into a wall. That would be disastrous, extreme, and messy, but effective, nonetheless. Of course, you could just apply the brakes before you hit the wall. Start softly then bear down as you get closer. As the car slows, you gain enough maneuverability to avoid the wall without a complete stop. The Fed, with its hands on the throttles of the economy was in a similar situation in 2021, but unfortunately, it waited too long to softly apply the brakes as that wall approached quickly. Instead, the Fed had to slam on the brakes with both feet. That reactive strategy came with the risk of either stopping the economy completely or possibly still even hitting the wall. Despite its best efforts the economy continued to veer toward the wall. Inflation remained as did the tight labor market that powered consumption.

The wall is still rapidly approaching but the car has markedly slowed down. The latest collection of economic numbers indicates slowing inflation along with a healthy, but not too hot, economy. Will we avoid crashing into the wall and swerve around it? Well, the possibility is becoming more and more probable. Yesterday’s private payroll numbers from ADP suggest as much, with a lower-than-expected monthly hiring number. Diving into the number we can see that the leisure and hospitality aggregate lost jobs last month. You may recall that it was bonanza hiring in that group that drove quite a bit of inflation in 2021 and 2022. To give you a bigger picture, the ADP National Employment report saw monthly hires breech +900,000 in late summer of 2021. Last year, with all the Fed hikes, monthly increases were in the +200,000 to +400,000 range. The trend continued into 2023 and peaked in June with +455,000 new hires. By September that number toppled to +89,000, and in the 2 months that followed remained low with yesterday’s number coming in at just +103,000 and last month’s number being revised down to +106,000.

Those numbers are consistent with a slowdown which may help avoid hitting the wall. But we are not out of the woods yet. Remember, the trick is to first, avoid hitting the wall, then second, to swerve while keeping the car in motion. What I mean by all this fancy metaphorical talk is that at some point the Fed will have to throttle up the accelerator to avoid a full stop. That would mean cutting interest rates. The real challenge is to get it just right… timing wise. Most traders agree that sometime next year may be the right time. More specifically, by March. Let’s be clear though, we have still not swerved to miss the wall. We will hear more about that next week when the Fed has its FOMC meeting and releases its Dot Plot. For now, it is probably smart to keep your seatbelt buckled and both hands on the wheel, as the Fed has a pretty solid track record of hitting walls, despite good intentions.

WHAT’S GOING ON IN THE PREMARKET

Danaher Corp (DHR) shares are lower by -2.16% after Goldman Sachs downgraded its recommendation to NEUTRAL from BUY. While Goldman sees continued health in the sector, it believes that Danaher is fully valued. In the last thirty days, 2 analysts raised their price target while 3 lowered them. Dividend yield: 0.43%. Potential average analyst target upside: +5.6%.

Alphabet Inc (GOOG/GOOGL) shares are higher by +2.67%/+2/58% in the wake of yesterday's announced release of Gemini, its next generation AI tool. The highly advanced AI engine is in a head-to-head competition with OpenAI’s GPT-4. Dividend yield: 0.43%. Potential average analyst target upside: +16.2%.

YESTERDAY’S MARKETS

NEXT UP

• Initial Jobless Claims (Dec 2) is expected to come in at 220k, slightly higher than last week’s 218k claims.
• Earnings after the closing bell: DocuSign, Vail Resorts, HashiCorp, Broadcom, and RH.