As the U.S. stock market prices in a “soft landing” scenario for the economy, January’s bumper jobs report, relatively strong corporate earnings and comments from Federal Reserve Jerome Powell over the past week could point to the possibility of a “ no landing.” ”, where the economy is resilient while inflation remains target.
According to Richard Flax, chief investment officer at Moneyfarm, such a scenario could still be positive for US stocks, as long as inflation remains stable. However, if inflation were to accelerate again, the Fed may be reluctant to cut its interest rate much, which could cause problems, Flax said on a call.
What last week tells us
Investors just navigated their busiest week this year for economic data and corporate earnings reports, with stocks closing at or near all-time highs.
According to market data from Dow Jones, the Dow Jones Industrial Average DJIA ended the week with its ninth record close of 2024. On Friday, the S&P 500 SPX index marked its seventh record close this year, while the Nasdaq Composite COMP it is down about 2.7% from its peak.
At Wednesday’s meeting, as expected, the Fed kept the interest rate unchanged in the range between 5.25% and 5.5%. However, in the subsequent press conference, Fed Chair Jerome Powell poured water on market expectations that the central bank might start cutting the benchmark interest rate in March, and stressed that they want “more confidence” in disinflation.
Roger Ferguson, a former Fed vice chair, said Powell introduced “a new kind of risk, missed-landing risk.”
In this scenario, inflation will stop falling, while the economy will be strong, Ferguson said in an interview with CNBC on Thursday. However, Ferguson said he doesn’t think this is the likely outcome.
Traders on Friday were pricing in a 20.5% chance that the Fed would cut interest rates at its March meeting, according to the CME’s FedWatch tool, down from more than a 46% chance a week ago. On Friday, the probability that the Fed will start its rate cut program in May was 58.6%.
Stronger-than-expected January jobs data released on Friday further eliminate the possibility of a rate cut in March, Flax said.
The U.S. economy added as many as 353,000 new jobs in January, while economists polled by the Wall Street Journal had forecast an increase of 185,000 new jobs. Hourly wages rose 0.6% in January, the largest increase in nearly two years.
Last week was also full of earnings reports, as several tech giants including Microsoft MSFT,
Apple’s AAPL,
When when,
and Amazon AMZN,
reported financial results for the fourth quarter of 2023.
Among the 220 S&P 500 companies that have reported earnings so far, 68% have beaten estimates, with earnings beating expectations by a median of 7%, Fundstrat analysts wrote in a note on Friday.
While earnings reported by big tech companies were “ok,” forecasts were not, said José Torres, senior economist at Interactive Brokers.
What has driven the rally in tech stocks since last year has largely been the prospect of sales of artificial intelligence products, but tech companies are not yet able to monetize this trend, Torres said in a phone interview.
Added to all this is the return of concerns regarding regional banks.
Shares of New York Community Bancorp Inc. on Thursday triggered the steepest decline in regional bank stocks since Silicon Valley Bank collapsed in March 2023. New York Community Bancorp posted a surprise loss on Wednesday and flagged challenges in the sector commercial real estate sector with problem loans.
Meanwhile, the Fed’s term financing program, launched in March last year to strengthen the banking system’s capacity, will expire on March 11.
If the Fed could start cutting its benchmark interest rate in March, it would be “kind of like an ambulance that would go and get the regional banks and save them,” Torres said. “Now the ambulance will arrive no earlier than May, I think between now and May we will be in a particularly risky period,” Torres said.
What investors should do
According to Torres, investors should abandon risk before May. “Last year, goods and raw materials helped a lot on the disinflationary front. This year, for disinflation to continue, we will need services to start contributing to it. Then we will need to see an increase in the unemployment rate,” Torres said.
He said he prefers U.S. Treasuries with a maturity of four years or less, as longer-dated ones could be susceptible to risks related to fiscal deficits and government debt. As for stocks, he favors healthcare, utilities, consumer staples and energy sectors.
Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. Slowing inflation, relatively strong economic data and earnings “don’t really paint a picture of a risk-off scenario,” he said. “The pattern of risk assets still leans towards a bullish expectation,” Buchanan added.
In the coming week, investors will keep an eye on ISM service sector data on Monday, the US trade deficit on Wednesday and weekly initial jobless claims data on Thursday. Several Fed officials will also speak, potentially providing further clues about the possible trajectory of rate cuts.