I'm On Fire

As many of you readers know, we here at RG have been in the higher-for-longer camp when it comes to interest rates for some time now.  As you also know, I live and breathe this macro stuff, which has absolutely zero to do with what the stock market is going to do over the short term.  (It probably just means nothing more than that I’m busy like Nobel laureate Paul Krugman trying to download child porn.)

While falling yields were pushing the Nasdaq higher in the fourth quarter, the script got flipped at the beginning of 2024.  Since then, rates have been rising, and the stock market has been on absolute fire.  This price action, with both stocks and interest rates rising concurrently, would typically only occur after a recession, such as in 2009 or the dot-com bubble around the turn of the century. 

Friday’s jobs report was one of the craziest I have ever seen.  On the surface, it was a blockbuster print.  The unemployment rate once again failed to rise, and average hourly earnings unexpectedly spiked from 4.1% to 4.5%.  This would, of course, support our higher-for-longer thesis, which I’m fine with, but I can’t help but think this jobs report was completely made up by the folks at the Bureau of Labor Statistics (BLS).

Why?  For starters, actual wages were reported to have risen, but that seems to be due to the BLS arbitrarily slashing the number of estimated hours that everyone was working from 34.3 to just 34.1.  That may not sound like much until one realizes that the last time the workweek was this low was when the economy was shut down for covid.

Additionally, the BLS conducted its annual "annual re-benchmarking and update of seasonal adjustment factors" and revised December’s print. The result was a decline in jobs until December that was  miraculously transformed into big fat gains.

It’s all quite fishy when you consider that ADP, which directly logs employment numbers at the company level and is actually far more accurate, shows an accelerating slowdown. 

For anyone keeping tabs on this sort of thing, here’s a brief list of announced layoffs so far this year:

Business Insider: 8% of workforce

Blackrock: 3% of workforce

Charles Schwab: 6% of workforce

Citigroup: 10% of workforce

Duolingo: 10% of workforce

eBay: 9% of workforce

Hasbro: 20% of workforce

LA Times: 20% of workforce

Levi's: 15% of workforce

Paypal: 7% of workforce

Pixar: 20% of workforce

Qualtrics: 14% of workforce

Roomba: 31% of workforce

Snap: 10% of workforce        

Spotify: 17% of workforce

Twitch: 35% of workforce

UPS: 2% of workforce

Washington Post: 10% of workforce

Xerox: 15% of workforce

Wayfair: 13% of workforce

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There may be an economic slowdown in place, but it’s nothing to worry about for the time being— the BLS print is where everybody’s focus is.  And the BLS jobs report, if one actually buys it, supports a soft landing outlook and economic growth.  However, it’s significant to note that Jay Powell must be struggling with it a bit as evidenced by his appearance on 60 Minutes last night.  Two days before the BLS report, he said, “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify that March is the time to do that (cut rates).”

Of course, there is an election this year, and we should never forget former New York Fed President Bill Dudley’s editorial rant about Trump in 2019.  I guess it’s no wonder that when Powell was asked on 60 Minutes, “How would you characterize the consensus around this table for rate cuts? Is everyone onboard?” he answered, “Almost all. Almost all of the 19 participants who sit around this table believe that it will be appropriate for us to cut the federal funds rate this year."

That, of course, makes it even funnier that he said, “Integrity is priceless; we don’t consider politics.” This, after Trump said on Friday that he would not keep Powell on as the Fed chief when his term expires in 2026.  Get out the popcorn.

It will be interesting to see what risk assets that were already priced for cuts do now, but the jobs report certainly supports the thesis that the stock market will keep on runnin’ this year.  The rush into technology stocks resembles the bubble of 1999, reflecting an assumption that the economy will perform strongly—over the short term-- despite the possibility of tighter-for-longer monetary policy. 

According to CFRA chief investment Sam Stovall, election years have only started with a gain in the first month 11% of the time. And once the S&P 500 crossed that threshold, stocks ended up gaining an average 15.6% for the year, with gains posted 100% of the time, both for the year and for the rest of the year.  So, if we’re going to be on fire, we may as well pour some gas on it.