The futures market is suggesting a mixed open to today’s stock trading. At 8:15 this morning, Automatic Data Processing (ADP) released its employment report for the month of December. This report showed that domestic businesses added 164,000 jobs, handily beating economists’ consensus estimate of 130,000 and the revised prior-month total of 101,000. It also revealed that wage growth continues to moderate. Soon after, the U.S. Labor Department announced initial jobless claims for the week ended December 30th tallied a light 202,000, compared to expectations of 219,000 and the prior-week figure of 218,000. Continuing jobless claims declined by 31,000, to 1.86 million. The new data does not conflict with the idea that, although dimming, the U.S. employment picture remains fairly bright. As this year unfolds, however, it is likely that the unemployment rate will incrementally rise, given elevated inflation and borrowing costs, which are modestly suppressing consumer spending and corporate budgets.
Also this morning, Standard & Poor’s will unveil the final results of its purchasing managers index (PMI) survey for last month. It’s widely anticipated to read 51.3, on a par with the preliminary “flash” outlook but an improvement over the November gauge of 50.8. A level above 50 indicates the sector is expanding, while one below that mark reflects a contraction. Separately, we note that the manufacturing PMI has been stuck below 50, showing weakness in the goods sector.
Tomorrow, investors will parse new data points (December), more specifically, unemployment and hourly wages, which are both expected to trend negatively. Additionally, the Institute for Supply Management will give its own measure of last month’s services sector activity, anticipated to show expansion, as well. Furthermore, the monthly trend in factory orders for November will be released by the U.S. Census Bureau; a decent improvement appears in the cards.
In the first two trading days of this new year, stock performance has been lackluster, especially when compared to the robust gains of 2023. We attribute some of the weakness to delayed selling on the part of those investors wanting to avoid tax payments on last year’s share-price gains, and a reshuffling of portfolios, in favor of attractively priced cyclical stocks over richly valued technology sector leaders. Also, some of the share-price stress is due to the Federal Reserve making public the minutes of its December meeting. Those minutes showed a fair degree of caution among members of the Federal Open Market Committee with regard to interest rates. There was a bit of division over how soon and by how much to reduce the federal funds rate (now 5.25%-5.50%), if at all. Chairman Jerome Powell subsequently made a few clarifications, easing some of the market concern. He reiterated that the central bank most likely will cut rates to the end of 2024.
As we have previously discussed, volatility may well rise in the first few months of the current year. Many on Wall Street anticipate Fed rate cuts to begin as early as March, with cuts numbering six quarter-point moves. Recent share-price weakness reflects emerging doubt that this scenario will play out. Indeed, the Fed has generally guided for three quarter-point cuts in short-term interest rates later in 2024. Of course, economic trends, including in inflation, consumer spending, employment, and corporate earnings, will influence the Fed’s rate strategy. Also possibly injecting added volatility into the stock market would be heightened political or military turmoil in Eastern Europe, Israel, and the Pacific Rim.
We advise investors to keep their individual portfolios well diversified, inclusive of holdings in large, mid- , and small capitalization equities, with an emphasis on the big names, supplemented with high-quality bonds and cash instruments. - David Reimer
At the time of this article’s writing, the author did not hold any positions in the companies mentioned.
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