Last week’s rally in US stock and bond markets defied bearish resistance, with further gains expected by year-end and into 2024 as Wall Street embraced the idea that the economy would achieve a “soft landing.” I had high hopes that it would be possible. A series of interest rate hikes by the Federal Reserve.
But market skeptics are warning investors that a “soft landing” scenario, in which consumer spending and employment growth slow and corporate profits slow, remains at risk.
“The stock market is misguided,” Josh Schacter, senior portfolio manager at Easterly Investment Partners, said in a phone interview with MarketWatch. “The market is almost bipolar – some asset classes such as bonds BX:TMUBMUSD10Y,
Oil BRN00,
+0.86%,
and dollar DXY,
Other assets such as stocks and Bitcoin BTCUSD are pricing in a recession.
-0.09%,
The pricing is risk-on. ”
U.S. stocks built on November’s gains last week, with the S&P 500 index SPX closing at a new 2023 high on Friday and the Dow Jones Industrial Average DJIA notching its fifth week of gains. The rally in stocks is partly because bond investors are starting to believe the Fed is done raising interest rates and is likely to start cutting rates by the first quarter of 2024.
Meanwhile, the theory that a resilient labor market and better-than-expected economic growth should be able to stave off a recession is gaining momentum, reinforcing the “Goldilocks” scenario for financial markets.
look: According to Wall Street’s favorite Permabear, these two leading indicators suggest a US recession has already begun.
But there are signs that consumer spending, which accounts for about 70% of U.S. economic output and has boosted the economy this year, is likely to run its course as the country recovers from the pandemic. Credit card and auto loan delinquency rates are rising, student loan payments are restarting and consumer spending is cooling, prompting warnings from major retailers.
Joseph Quinlan, head of CIO market strategy at Merrill and Bank of America Private Bank, said “softness” in the U.S. consumer sector is visible but not significant. , calling it the “canary in the coal mine.” Called on Thursday.
The rebound in consumer spending is welcome news to Fed officials, who have raised interest rates 11 times since March 2022 to bring inflation back to their desired 2% target. But some analysts say high interest rates and reduced savings due to the pandemic could ultimately lead to a weakening of consumers in 2024, another sign of a long-predicted slowdown in the U.S. economy. I am concerned that this is a possibility.
“One of my biggest concerns is whether consumers will be able to continue to keep up the pace of the economy. There are some headwinds that are not fully resolved yet.” said Jason Heller, senior executive vice president of Coastal Wealth. . “Are consumers continuing to behave as they have for the past 36 months? I think ultimately we’re going to see a slowdown in consumer spending and a slowdown in the labor market is inevitable.”
Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, acknowledged that a slight slowdown in inflation and job growth means the “Fed rescue rally” in stocks can be sustained, but her concerns , this late-cycle impasse is no different than before. It’s a moment of bliss before data reveals the very reason inflation is slowing: economic growth and employment are slowing.
look: Former Treasury Secretary Larry Summers: “We’re still headed for a pretty hard landing”
That’s why the November jobs report, to be released by the Bureau of Labor Statistics next Friday at 8:30 a.m. ET, will be key for investors. The U.S. is expected to add 172,500 jobs in November, after adding 150,000 the previous month, according to a survey of economists from Dow Jones. The share of unemployed Americans looking for work is expected to remain flat at 3.9%, the highest level since early 2022.
look: U.S. job growth will be in focus this week
In fact, the release date of the non-farm employment report is the most volatile day for the stock market in 2023 compared to the release date of the monthly consumer price index, which is why the S&P 500 and other major indexes It caused some of the biggest daily ups and downs. In 2022.
See also: Will CPI day still rock the stock market? How will he prepare for 2022 in 2023?
The average absolute volatility of the S&P 500 index this year was 1.12% on employment report days, compared with 0.64% on CPI days, according to figures compiled by Dow Jones Market Data.
That said, analysts are skeptical that the employment data will tell a “fundamentally different story”, although they do suggest the labor market will remain relatively tight through 2024. Quinlan and Lauren Sanfilippo of Merrill & Bank of America Private Bank said in a telephone interview. .
look: What the 2024 S&P 500 predictions really tell us about the stock market
Too optimistic about profit growth in 2024
American companies and their stocks are telling investors a different story about next year.
Heller said the U.S. stock market is far from recession-prone, with average earnings growth for the S&P 500 index next year estimated at 11.7%. “we, [the stocks] Significant growth is priced into 2024. ”
Merrill and Bank of America Private Bank strategists predict that the S&P 500’s earnings growth rate in 2024 will be in the “single digits” as profits dry up and the economy returns to a 2% real growth rate. I’m in the camp that predicts it to be in the middle. After high interest rates restricted consumer spending and corporate profits, cooling a red-hot economy.
Indeed, Wall Street analysts tend to overestimate earnings per share (EPS) for the S&P 500, said John Butters, senior earnings analyst at FactSet.
The current bottom-up EPS estimate for the S&P 500 in 2024 is $246.30. If true, this would be the highest EPS number reported by a large-cap index since FactSet began tracking the index in 1996.
But over the past 25 years, the average difference between year-end EPS estimates and actual EPS numbers has been 6.9%, meaning analysts overestimated earnings a year in advance, on average, Butters said. said in a memo Friday. (See graph below).
