The U.S. equity markets have been driven by a narrow set of stocks for more than a year now, but market leadership today is getting downright razor-thin. The only two sectors beating the S&P 500 year-to-date are tech and communication services, although healthcare to be fair is virtually tied. Five S&P 500 sectors are down so far for 2024, three of them by more than 3%. Small-caps are down. Developed and emerging markets are down. Treasuries are down. Gold is down. This is not a healthy market environment. There’s no question that investors got way out over their skis in pricing in 7 rate cuts by the Fed in 2024 and some of that has needed to get priced back out in the short-term, but the long-term fundamentals are actually getting worse. If you’re paying attention only to GDP growth and non-farm payrolls, you’re missing a lot of the big picture.
Powell said in December that the central bank was forecasting three rate cuts this year, but it’s looking like even that might be optimistic. GDP growth of 3%, an unemployment rate below 4% and core inflation still hovering at 4% aren’t usually the conditions where you start rate cutting cycles. The argument, however, was that inflation overall was normalizing and wage growth was coming back down to earth. After declining since 2021, wage growth has actually begun ticking back up again. Average hourly earnings were up 0.6% in January, the biggest monthly gain since March 2022, following a 0.4% increase in December. Those numbers would support the idea of higher inflation here, not lower, and makes it more difficult to argue that rate cuts should begin in the first half of this year. After pricing in an imminent hike at the March meeting just weeks ago, the market is now pricing in a not insignificant 1-in-3 chance that rate cuts won’t begin until June. Investors who are still expecting a half dozen cuts from the Fed in 2024 might want to reset their expectations now.
On the flip side, the labor market, despite two straight years of a sub-4% unemployment rate, might be at its most vulnerable point for a reversal in a long time. Corporate layoffs, especially in the tech sector, are being announced on almost a daily basis now. Microsoft, Google, Citigroup, Deutsche Bank, eBay, Macy’s, American Airlines and others have already announced job cuts. Snap and DocuSign were added to the list this week and, while the absolute number of job cuts from these two companies won’t make a big dent in the labor market, it’s a troubling trend that’s getting wider and growing worse. We saw the Challenger job cuts report come in much higher than expected. Continuing jobless claims have moved higher as well. All of this, in my opinion, is evidence that the labor market is actually weakening, not strengthening, and could be the domino that tips the entire economy.
Then there’s the report from the New York Fed that said credit card delinquencies surged 50% in 2023. All of the high level data, including retail sales figures, suggest that the economy and the consumer are still in a healthy place. In reality, the consumer is getting completely tapped out and all of that retail sales growth is being done with credit, not cash. With the U.S. economy in another K-shaped growth cycle, a lot of consumers simply aren’t going to be able to spend in the way that they have over the past couple years. The weakness in consumer behavior & the labor market are intertwined and it’s telling us that the danger levels are getting high.
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