Prior to commencement of today’s trading, the U.S. Bureau of Labor Statistics released employment data for the month of January. Nonfarm payrolls surged by 517,000, versus economists’ expectation of 187,000 and the revised previous-month gain of 260,000. Another surprise was a decline in the unemployment rate to 3.4% from 3.5% in December. Average hourly earnings rose 0.3%, month to month, in line with the experts’ outlook and the one-month-earlier reading. The labor-force participation rate improved modestly, to 62.4%. The latest data show that the Federal Reserve may have more work to do in containing inflation. Looking at the futures market, stocks seem likely to open down this morning.
Overall, the stock market appears on track for improvement this week, led by the tech-weighted NASDAQ Composite and the broader Standard & Poor’s 500 Index. The blue-chip Dow Jones Industrial Average may well post a flat-to-down showing. Through Wednesday afternoon, prior to the Fed’s latest interest-rate-setting announcement, stocks largely moved sideways, influenced by mixed corporate earnings reports and economic information. The employment cost index increased, albeit at a slower pace, home prices continued to trend lower, consumer confidence softened, and manufacturing indexes indicated contraction, while job openings stepped up modestly and the workers’ quit rate held steady. (Services index readings are forthcoming.)
The Fed’s Wednesday afternoon announcement of a one-quarter percent hike in short-term interest rates, to 4.50%-4.75%, was initially taken in stride by investors, since it met their expectations. Creating enthusiasm among the investment community, however, were hints by Fed chairman Jerome Powell that the central bank could be close to the end of its current interest-rate-hiking cycle. Generally, Fed officials are still saying rates will rise to just above 5% by summer. That suggests one-quarter increases in March and May, bringing the benchmark Federal Funds range to 5.00%-5.25%. Additional data on inflation, employment, wages, and corporate earnings surely will influence the ultimate outcome of the Fed strategy. The central bank anticipates keeping rates high through year end. Stock and bond markets, though, seem to have been expecting rate cuts, starting before 2024.
This week, Facebook social media parent Meta Platforms (META) turned in strong December-quarter operating numbers and provided encouraging guidance for upcoming quarters. Integrated petroleum giant Shell plc (SHEL) reported record results. Internet retailer Amazon.com (AMZN) posted higher-than-expected sales, but earnings fell short of the Street consensus. Google Web-search engine owner Alphabet (GOOG) displayed a lackluster performance, though management is optimistic about future business. Apple’s (AAPL) iPhone sales came under stress, due to China supply disruptions, as was evident in the latest operating results. Restraining broader market momentum were drug maker Merck & Co. (MRK) and diversified company Honeywell Int’l (HON), which disappointed on the earnings front and on their near-term outlooks. For the most part, companies are beating analysts’ estimates, but not by wide margins; estimates had been coming down for several weeks. Nevertheless, NASDAQ and S&P stocks appear poised to achieve low-single-digit gains for the week. The Dow may have trouble holding firm.
Stocks have traded up on expectations of possible coming interest-rate cuts, more so than on the economic and business fundamentals. This could be misguided optimism. On a positive note, we don’t expect anything more than a mild recession to occur in the short run, given fairly decent corporate and household finances. Markets may prove resilient through the end of 2023. On balance, there’s still a good degree of uncertainty. Investors can protect their portfolios with significant weightings in both high-quality growth and defensive issues.
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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