Market Awaits Jobs, Powell
What happened last week?
- The S&P 500 gained 1.90%
- The Dow Jones rose 1.75%
- The Nasdaq composite increased 2.58%
This week, the market will focus on the February jobs report out Friday. Economists are calling for the addition of 220K jobs and a steady 3.4% unemployment rate. We believe the 517K jobs created in January’s report marked the last big print of this cycle and job losses lie ahead as firms cut costs to protect their margins.
The market will also monitor Fed Chair Powell’s remarks before Congress on Tuesday and Wednesday.
3 Things to Know
Analyst revisions: not low enough
We fear that negative business cycle risks for markets remained underpriced even as analysts’ estimates project a new record high for US corporate profits by the fourth quarter of 2023.
Earnings per share (EPS), a metric used for estimating corporate value, fell at a 14% annualized rate in the second half 2022. EPS in the fourth quarter of 2022 were 4% below CGWI’s quarterly estimates. For the first half of 2023, we expect EPS to continue to fall at roughly the same pace, leaving full-year 2023 EPS 10% below last year.
Share prices haven’t caught up
Last year’s decline in share prices — coupled with surging interest rates — was indicative of where corporate profits would trend in 2023. Markets are more likely than not to price earnings declines, not rosy estimates.
In our view, it may take some months before share prices reflect current economic conditions, signaling further weakening in business activity.
Later in 2023, we expect markets to begin to focus on the recovery of 2024, when CGWI anticipates a 5% EPS gain, strengthening into 2025 and beyond. But not before a reconciliation between real earnings and valuations.
For many economists, the idea that the whole US economy has had a sudden, sharp acceleration at the start of 2023 seems implausible.
Did US employers decide to double their hiring pace in January while simultaneously announcing the largest layoffs since the COVID shutdowns? And did US retailers, in fact, experience a sudden spending boom in January after reporting poor holiday sales?
The Fed is using the positive economic data and “persistent” month-over-month inflation to justify ever higher short-term rates.
Emphasizing lagging economic indicators that are calculated looking back 12 months ignores what’s happening now. Lagging residential rents — imputed by comparing today’s home prices to those a year ago — appear to be steady or rising when actual rents have begun a meaningful downhill trend.
Here’s another example: Current demand for US labor reflects current production requirements. Residential homes started 12–18 months ago are being finished for delivery now. However, the surge in interest rates has caused a historically sizeable drop in home sales, with new housing permits and starts following sales lower. Construction employment across the industry will adjust to the much slower future production pace once housing units under construction are finished. While this isn’t the immediate condition for housing employment, it is the near future.
This dynamic will occur across many industries with high inventories. It will impact related services employment, too, as marketing, advertising, customer service and finance activities associated with the industry are curtailed.
All of this can occur even as certain sectors, like travel and tourism, still exhibit growth due to pent-up, Covid-related demand.
See our weekly CIO Strategy Bulletin for more details