North American equity markets started the week slow ahead of Chairman Powell’s speech on Wednesday at the Brookings Institute. Equity markets finished the week higher, assisted by Chairman Powell mid-week comments suggesting a slowing of rate increases. For the week, growth stocks outperformed value stocks in the S&P 500, while the tech-laden Nasdaq index was the leader of all indices. To date, the Dow is up 20% from the September bottom and is down 5.26% year-to-date compared to the Nasdaq, which is down 26.74% over the same period. In Europe, all indices finished higher for the seventh consecutive week due to lower inflation data and the hope that central banks might slow the pace of monetary tightening.
On Monday, in an interview with MarketWatch, the St Louis Fed President James Bullard responded to a question about the length of time the Fed funds rate will have to remain in the 5% to 7% range by stating, “I think we’ll have to stay there all during 2023 and into 2024.” In addition, indicated rates will likely be over 5% for most of 2023.1 Based on the market reaction, we hold the opinion that market sentiment is anticipating a pause in the early first half of 2023.
On Tuesday, in another sign of weakness in real estate, the S&P CoreLogic Case-Shiller US 20-City Index reported a 10.6% annual gain but a decline of 1.2% in September over August. The year-over-year appreciation reflected strong conditions in late 2021. All 20 cities experienced month-over-month declines, with the western region leading. While home prices peaked six months ago and have slowly declined since then, year-over-year gains in high-growth areas are still double-digit, with Miami, Tampa, and Charlotte reporting the highest year-over-gains at 24.6%, 23.8% and 17.8% respectively.1 According to the latest reading from the Conference Board, consumer confidence fell again in November to 100.2 from 102.2 in October. The Present Situation Index, a measure of consumers’ assessment of current business conditions and labor markets, fell to 137.8 from 138.7 last month. Based on consumers’ views on the outlook for income, business and labor market conditions in the next six months, the Expectations Index declined to 75.4 from 77.9.2
We had the first indication of job creation on Wednesday from the ADP National Employment Report. Private payrolls added 127,000 in November, the slowest pace since January 2021. Services in leisure and hospitality added 224,000 jobs, while goods producers lost 86,000 and manufacturing lost 100,000 jobs.3 The Chicago PMI reading for November collapsed to 37.2 points from 45.20 points in October. New orders, production, orders backlog and suppliers’ deliveries recorded declines. On a positive note, employment rose modestly by 1.5 points (a reading below 50 indicates contractions and over 50 expansions). The latest reading is the lowest since May 2020 and is the last of the regions reporting ahead of the November National ISM data on Thursday.4 Job openings fell to 10.3 million in October from 10.7 in September. The service sector added 76,000 jobs, finance and insurance added 70,000, state and local government excluding education lost 101,000, nondurable manufacturing lost 95,000 and the federal government lost 61,000.5
On Thursday, the employment claims ending on November 26 were 225,000, down 16,000 from the previous week. Continuing claims of all benefit programs for the period ending November 12 was 1,367,913, increasing by 115,477.6 We believe claims will rise in the wake of announced layoffs in recent weeks. The closely watched personal consumption expenditures index, a key gauge of inflation, rose 0.3% in October, bringing the annual rate of the headline rate to 6.0%. Excluding food and energy, the rate rose 0.2%, reducing the annual rate to 5%.7 In another sign the economy is getting weaker, a crucial indicator of factory activity in November, the Manufacturing ISM, fell to 1.2% to 49%, the lowest reading since May 2020. Three of the eight components of the index moved lower, while only one, the Inventories Index, was expanded (a reading over 50 indicates expansions and a reading below contractions). Two of the most significant manufacturing industries, petroleum and coal products; and transportation equipment, registered weak to moderate growth for the month.8
The big economic data surprise for the week came on Friday with the US Bureau of Labor Statistics release of their nonfarm employment report. The increase in November was 263,000 compared to the street expectation of 200,000. The unemployment rate remained unchanged at 3.7%.9
Wage inflation is one of the areas of inflation the Fed is trying to prevent. With job creation at a historically strong pace, the worry is inflation will remain higher than is acceptable for the Fed to pause or pivot even though, by many measures, economic activity is already slowing. Contractions in real estate, manufacturing, and lower commodity prices are strong indications of a slowing economy. Meanwhile, labor markets remain persistently tight. While the Fed repeats sentiments of higher rates for longer, market participants continue to hear no evil, see no evil, and drive markets higher. If earnings in the next couple of quarters decline as the domestic and global economies slow, we believe there will be a decline from recent levels sometime in 2023.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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