S&P 500: +1.38% DOW: +1.43% NASDAQ: +1.12% 10-YR Yield: 4.03%
Last Week on WallStreet - February 3rd, 2024
During a bustling week on Wall Street, investors grappled with an influx of data, including major tech earnings releases, an FOMC Meeting, and the January US Jobs Report. Despite the week's intensity and a couple of volatile sessions, the S&P 500 achieved a fresh all-time high and notched its fourth consecutive week of gains. As the week concluded, market participants found more reasons for optimism regarding the economy and company performance. The ongoing earnings season has shown resilience, with prominent firms like META surpassing expectations for their quarterly results. The robust jobs report further instilled confidence in the continued strength of the consumer-driven economy, which has consistently exceeded expectations. This economic resilience, combined with Powell's indication that a March rate cut is improbable, prompted a rise in interest rates as markets tempered their expectations for timing on anticipated rate decreases throughout the year.
Beneath the surface, all but 2 sectors of the S&P 500 finished the week with gains. Discretionary (+3.3%) and Communications (+2.7%) on economic optimism and company earnings. Energy (-0.9%) and Real Estate (-0.5%) fell as softer oil prices and higher interest rates hampered performance.
Fed Signals Cuts Are Possible But Not Imminent as It Holds Rates Steady
- The Federal Reserve held its benchmark federal-funds rate steady in a range between 5.25% and 5.5%
- “It’s a highly consequential decision to start the process” of lowering interest rates “and we want to get that right,” said Fed Chair Jerome Powell
- Powell also shared that they have made progress on inflation but still want to ensure its fully subdued and that a March cut is unlikely
The key takeaway - Jerome Powell and his colleagues have acknowledged a shift in their stance, indicating that, currently, the risks to policy have achieved a better balance. In Fed speak, this implies a shift in focus towards contemplating rate cuts as opposed to the possibility of hikes. The progress in addressing inflation concerns, coupled with sustained economic stability, has given them the opportunity to pursue a soft landing. However, the central bank must tread cautiously, aiming for a delicate balance. Initiating rate cuts prematurely, before inflation is fully under control, may result in sustained price growth exceeding the targeted 2%. Conversely, if they persist with elevated rates for too long, high borrowing costs could slow the economy into a recession. Market sentiment is leaning towards anticipating more aggressive and earlier rate cuts than the Fed has indicated so far.
US Economy Added 353,000 Jobs in January, Much Better Than Expected
- Nonfarm payrolls expanded by 353,000 for the month, better than the Dow Jones estimate for 185,000
- The unemployment rate held at 3.7%, against the estimate for 3.8%
- Average hourly earnings increased 0.6%. On a year-over-year basis, wages jumped 4.5%
- Job growth was widespread on the month, led by professional and business services with 74,000
The key takeaway - Undoubtedly, the January jobs report exceeded all expectations, underscoring the robustness of the US labor market. Despite notable layoffs in specific sectors, the majority of the economy appears to be expanding their workforce and offering higher wages. The sustained strength in the job market serves as a positive indicator for the overall economy, largely propelled in recent years by a confident and financially secure consumer base. However, this prolonged tightness in the labor market presents challenges for the Federal Reserve as they aim to shift away from their restrictive policy. The unexpectedly strong growth in wages, as revealed in this report, raises concerns, as elevated labor costs may contribute significantly to the persistence of stubbornly high inflation.
Consumer Sentiment in January Jumps to Highest Level in 2 1/2 Years
- The final reading of the sentiment survey shot up to 79.0 from 69.7 in December
- A gauge that measures what consumers think about the current state of the economy rose to 81.9 from 73.3 in December
- A measurement of expectations for the next six months perked up to 77.1
- Americans think inflation will average 2.9% in the next 12 months, marking the lowest level in four years
The key takeaway - Understanding and gauging consumer sentiment is important for guiding the directions and maintaining stability in the US economy, as it significantly influences their behavior. When Americans perceive stability in their financial standing and foresee its continuation, they are more inclined to engage in spending, thereby stimulating economic activity. Conversely, if there are concerns about potential troubles ahead, consumers are likely to scale back on discretionary spending. Notably, consumer sentiment has been on an upward trajectory in recent months, with a notable surge in January regarding how Americans perceive their situations, the current and future state of the economy, and inflation. While sentiment can be subject to volatility, influenced by variables such as stock returns and gas prices, it serves as a valuable indicator of consumer behavior. When coupled with a robust jobs report, this positive sentiment suggests the potential for the economy to maintain its resilient pace.
From Around the Watercooler
Apple, Amazon, and Meta released their latest financials, and all three beat Wall Street’s revenue expectations
PGA Tour is receiving a $3 billion investment from Strategic Sports Group, a consortium of big-name investors led by Fenway Sports Group owner John Henry
Walmart is going big on brick-and-mortar with plans to add 150 larger stores in the next five years
H&M’s CEO unexpectedly resigned as the fast-fashion retailer faces declining sales and increased competition from online giants like Shein