Stock futures are suggesting a mixed open to this new trading day. The U.S. Bureau of Labor Statistics released employment figures for the month of February. Some 311,000 jobs were added, greater than economists’ expectations for an increase of 225,000, but down from the outsized January step-up of 517,000. Pre-market, investors seemed to focus on the modest increase in average hourly wages, up 0.2% month over month, compared to an anticipated 0.4% gain. The unemployment rate increased to 3.6%, above the experts’ outlook of 3.4%. The labor participation rate ticked up one-tenth of a percent, to 62.5%.
The major domestic stock market indexes look to post another down week. Most visibly, in his testimony to the U.S. Senate on Tuesday, Federal Reserve Chairman Jerome Powell stated that, depending on the latest economic data, he would be open to approving a more-aggressive short-term interest rate hike of one-half of a percentage point, to the 5.00%-5.25% range, at the central bank’s upcoming March 21-22 meeting. Wall Street had been anticipating a smaller one-quarter of a point increase. Mr. Powell indicated that rates might need to move higher and stay elevated for a longer period than he was expecting before the start of 2023. A key concern for him is that the labor market remains quite strong, posing the risk of spiraling wages and prices for goods and services. Stock valuations moved sharply lower on his testimony. We wouldn’t expect that today’s labor market report is likely to change the Fed’s view much.
Mr. Powell’s concern appears warranted. Indeed, as was reported by the U.S. Department of Labor earlier this week, job openings in January, though down from 11.2 million in December, were still elevated at 10.8 million. There are currently only about 5.7 million people actively looking for work. Other recent data depicting a strong employment market included Automatic Data Processing’s (ADP) measure of 242,000 jobs being added in February, up from 119,000 in January, and the Labor Department’s reading of 211,000 jobless claims filings for the week ended March 3rd, versus 190,000 in the previous week, marking continued modest losses. A
growing number of Wall Street pundits are expecting federal funds interest rates to rise to as high as 5.75% this year. Higher rates pose the risk of a recession occurring in the near term. Short-duration 2-year Treasury notes continue to have significantly higher yields than longer-dated 10-year Treasurys, a circumstance also referred to as an “inverted yield curve,” which often is a predictor of an economic downturn.
Adding to worries on Wall Street, and rattling the banking sector, was an announcement on Thursday by SVB Financial Group (SIVB), a provider of venture capital funding to the “Silicon Valley” technology industries, that declines in customer deposits forced a sale of most of its debt securities portfolio, at a loss. Also, the bank said it needs to raise money, via a common stock issue, to beef up its liquidity position in the now higher interest-rate environment. SVB’s share price dropped more than 60% on the news. Though we don’t expect a domestic financial crisis to happen, there is heightened risk of other unusual “black swan” events. The Federal Reserve will surely monitor the financial markets for any signs of further stress. Additional data on inflation, wages, retail sales, housing starts, manufacturing and industrial activity, and employment, due out next week, will help the Fed to fine tune its rate-making policy.
At this juncture, it seems prudent for investors to adopt a defensive posture. Our current asset allocation model calls for holding 55% of portfolio funds in equities, 10% in top-grade bonds, and 35% in cash instruments. A defensive approach would call for an emphasis on high-quality large cap 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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