Call it the “yes, but” stock market.
It’s easy to look at the week stocks have had and say the worst is over. The
Dow Jones Industrial Average
increased by 0.8%, while
gained 1.9% and the
climbed 4.6%. The Nasdaq even managed to chain five consecutive days, its longest winning streak since November 2021.
Yes, but…it’s hard to understand why the market reacted so enthusiastically to the news of the week. Investors entered the week hoping for, if not a recession, at least some signs that the economy is slowing enough to prevent the Federal Reserve from aggressively raising interest rates. But the ISM non-manufacturing index was stronger than expected, as were durable goods orders and the Jolts job openings report. Payrolls data for June, the peak of economic reports, looked particularly strong: the economy added 372,000 jobs last month, nearly 100,000 more than economists had expected, boosting first caused the stock market to fall.
Yeah, but…the jobs report, in particular, might not have been as good as it looked. While the number of establishments was very high, the household survey showed a loss of 300,000 jobs, while the unemployment rate remained unchanged at 3.6% only because the workforce has decreases. At the same time, the average hourly wage increased by only 0.3% in June compared to the level in May, which is below the rate of inflation.
That’s good news on the inflation front – wages follow prices is a way for them to get sticky, observes Deutsche Bank strategist Alan Ruskin – and could signal a soft landing for the economy if workers have enough money in savings to avoid a spending slump.
“The latest data, with softer work hours but robust employment and suitably strong but slower wage growth, can be said to be roughly in line with this narrow soft-landing ground,” Ruskin writes. , “but if it can be repeated month after month will need luck as much as any central banking skill.
It certainly seems unlikely. In fact, the only thing that seems certain is that the Fed will continue to raise rates. The CME FedWatch tool shows a 100% chance the central bank will raise rates by three-quarters of a point on July 27, and a 100% chance of raising rates by at least half a point in September. The other near certainty is that earnings will slow, which Richard Bernstein Advisors says doesn’t happen very often.
It’s also not very good for the market. The S&P 500 has historically returned 1.7% per quarter, with a probability of loss of 43%, under these two conditions.
Yes, but… there are still reasons for optimism. Among them: Inflation-protected Treasuries are starting to price in lower inflation, with 10-year TIPS reflecting just 2.33% inflation, down from nearly 3% in April. Likewise, commodity prices fell and the dollar rose. All indications are that the Fed may not be as far behind the curve as some investors think, writes Michael Darda, chief economist at MKM Partners.
If so, the stock market could be beaten enough. “Recession or no recession, investors probably won’t be able to predict a market bottom,” says Darda. “Therefore, the opposite would put funds to work here.”
Write to Ben Levisohn at Ben.Levisohn@barrons.com