Strong January Jobs Report and Corporate Earnings Suggest Possibility of No Landing for US Economy
The U.S. stock market has been anticipating a “soft-landing” scenario for the economy, but recent developments suggest that there may be no landing at all. A blowout January jobs report, strong corporate earnings, and Federal Reserve Chairman Jerome Powell’s comments have raised the possibility of a resilient economy with steady inflation. This scenario could have positive implications for U.S. stocks, as long as inflation remains stable, according to Richard Flax, chief investment officer at Moneyfarm. However, if inflation picks up again, the Fed may be hesitant to cut its policy interest rate, which could spell trouble.
Busy Week for Investors
Investors have just experienced the busiest week of the year so far, with an abundance of economic data and corporate earnings reports. Despite this, stocks ended the week at or near their record highs. The Dow Jones Industrial Average (DJIA) achieved its ninth record close of 2024, while the S&P 500 index (SPX) reached its seventh record close this year. The Nasdaq Composite (COMP) is slightly lower from its peak, but overall, the market has been performing well.
Federal Reserve’s Stance
During its Wednesday meeting, the Federal Reserve decided to keep its policy interest rate unchanged, as expected. However, in the subsequent press conference, Chairman Jerome Powell dampened market expectations of an interest rate cut in March. Powell emphasized the need for “greater confidence” in disinflation. This cautious approach introduced a new risk known as the “risk of no landing,” according to Roger Ferguson, former Fed vice chairman. In this scenario, inflation would stabilize while the economy remains strong. Although Ferguson believes this outcome is unlikely, it highlights the uncertainty surrounding the economy.
Changing Market Expectations
Market expectations for a rate cut in March have decreased significantly. Traders were pricing in a 20.5% likelihood on Friday, compared to over 46% the previous week. The likelihood of a rate cut in May stood at 58.6% on Friday. The stronger-than-expected January jobs data further diminishes the chance of a rate cut in March. The U.S. economy added an impressive 353,000 new jobs in January, surpassing economists’ forecast of a 185,000 increase. Additionally, hourly wages rose by 0.6%, the largest increase in almost two years.
Corporate Earnings Reports
The past week also saw a flurry of earnings reports from major tech companies such as Microsoft, Apple, Meta, and Amazon. Among the S&P 500 companies that have reported their earnings so far, 68% have beaten estimates, with earnings exceeding expectations by a median of 7%. However, while the reported earnings were satisfactory, the guidance provided by tech companies was not. José Torres, senior economist at Interactive Brokers, noted that the rally in tech stocks was driven by the prospect of sales from artificial intelligence products. However, these companies have yet to monetize this trend, leading to concerns among investors.
Headwinds for Regional Banks
Regional banks are also facing challenges, with concerns resurfacing in this sector. New York Community Bancorp Inc.’s stock experienced a significant drop, triggering the largest decline in regional bank stocks since March 2023. The bank reported a surprise loss and highlighted difficulties in the commercial real estate sector due to troubled loans. Adding to the uncertainty is the expiration of the Fed’s bank term funding program on March 11. The delay in potential rate cuts until May poses risks for regional banks, according to Torres.
Investment Strategies
Investors are advised to adopt a risk-off approach before May, according to Torres. He recommends investing in U.S. Treasuries with a tenor of four years or shorter, as longer-dated ones may be susceptible to risks associated with the fiscal deficit and government borrowing. In terms of stocks, Torres prefers the healthcare, utilities, consumer staples, and energy sectors. On the other hand, Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. He believes that the slowdown in inflation, along with strong economic data and earnings, does not support a risk-off scenario. Buchanan maintains a bullish expectation for risk assets.
Upcoming Events
In the week ahead, investors will be closely monitoring the ISM services sector data, U.S. trade deficit figures, and weekly initial jobless benefit claims numbers. Several Fed officials will also be speaking, potentially providing further insights into the trajectory of rate cuts. These events will shape market expectations and influence investment decisions in the coming weeks.