The improvements in the stock market on Friday (January 6th) were a good turnaround. So, what now? More of the same? It could be, but not because of the December employment report. We saw this report lose steam in the following days. There are other notes that can linger in the happy environment—for a while, at least.
Unemployment, not employment, is the main indicator, and it is favorable
The employment numbers and analytics released last Friday are good, but it’s the persistently low unemployment numbers that are especially important. Continued low weekly unemployment claims (next report Thursday) and last Friday’s low monthly unemployment numbers provide the best evidence that there is no economic slowdown or recession ahead.
contra noteEmployment growth is slowing and layoff announcements are increasing. An open question: Is this just a sign of declining growth and a focus on returning productivity, or is it a precursor to more serious cuts?
The next inflation report should be favorable
Econoday.com’s compiled forecast for the December 2022 CPI report released Thursday is for further improvement. The projected rates are 0% per month (for all CPI items) and 0.3% (for CPI – all items minus food and energy). As these projected numbers replace the higher December 2021 rates of 0.6% for both, the 12-month delayed rates should fall again.
contra note: Some of the previous price hikes were caused by temporary factors (such as car pricing), and they are now coming down. Just as they gave inflation numbers a temporary increase before, they have given them a temporary decrease recently. Eventually, this negative influence will wear off.
Consumer sentiment can have an unexpected positive uptick
The University of Michigan’s measure of consumer confidence for January will be released the next day – Friday. Sentiment was a continuing handicap, but the typical analysis stopped at a top-line measure, rather than examining the survey’s four domains: income, assets, debt, and prices. These four follow very different paths, especially when the total number drops. This time, prices (inflation) were the main drawback to the total number.
So, with inflation now entering its seventh month of subdued price hikes and media reports turning positive, this sentiment area should improve. Econoday.com forecasts point to only a slight uptick – from December’s 59.7 to December’s 60. (Forecast range from 57.4 to 62.) An actual reading of 62 or higher could come as a surprise.
contra note: While price concerns should recede, there was some slight decline in income and asset sentiment. Since monthly survey results are volatile, we’ll have to wait and see if these declines are precursors or just survey signals?
The Fed’s stern words have yet to match action
Not enough has been written about what the Federal Reserve is Not Action.
The first is a small reduction of their vast holdings of bonds bought through deposits created on demand (ie, freshly printed money – a major cause of ‘mandatory’ money inflation). And until they stop those purchases, that surplus cash continues to linger, helping the inflationary environment.
Second, the “significant” interest rate increases that give it its name. Unlike any other time, they started their “tightening” downstairs at 0%. This is why increases (not actual price levels) appear to be historically high. A more accurate measure of tightening is how short-term US Treasury prices compare to the rate of inflation – in other words, the “real” (inflation-adjusted) interest rate. Except for periods of very high inflation, a tight monetary situation occurs when short-term rates exceed the rate of inflation. The Fed’s 15-year low interest rate control still does not allow the short-term rate to reach, let alone exceed, the inflation rate. So, we’re still in a negative real interest rate environment, and that means conditions are still “loose” or “easy” — not tight.
So, the good news is that we don’t have to worry that the Fed is leading us into a terrible recession. So it’s not even close yet.
contra noteMinutes from the latest Fed meeting reported a discussion of investor optimism that the Fed’s interest rate increases could be slowed, halted, or even reversed by the recent declines in the inflation rate. The concern is that optimism would undermine the Fed’s anti-inflationary measures. If so, the Fed may decide to take stronger action to quash optimism.
The stock market fads of 2021-2022 look like they’re officially dead
The death of fads is an important sign that the stock market has rattled weak investors and ill-conceived investment strategies. The last two weeks have seen the remaining fashion leaders finally reach ground zero (that is, back to the point where they started). With No fad investor has gainsall fad participants are likely gone:
- meme stock
- Special Purpose Acquisition Companies (SPACs)
- IPOs in the field of biotechnology
- Nonprofit growth story stocks
So, can a new bull market start now?
No, shaking down weak investors causes primitive prices to fall again. However, this does not mean that new fads are ready and ready to go. First, similar heresies are not repeated immediately after they have been killed. Second, just as watching a car crash causes drivers to be wary for some time afterward, seeing a fad die makes investors wary.
So, what’s the good news? Finally, the media can stop reporting on those old investments. Now, it’s time to focus again, and that’s when the investment regains the core interest that creates a strong following.
contra note: There are a lot of uncertainties and pitfalls beyond past fads, and a happy transition can take time. Chances are, even if inflation recedes as a concern, some or many of these other issues will come to the fore.
The rest of the stock markets made some shakes, too
Look at any stock examination, and many attractive issues will reveal themselves. amazing! Time to buy! – wait! How do you decide? There are many.
exactly. There are at least five major issues at work, of which only one is taken care of.
- Exaggerated growth stocks from overly optimistic investors – the shake seems to have taken care of that
- growth slows down – Question: How far will you go?
- Interest rates are high, which reduces the present value (share price) based on expectations – QuestionHow high will interest rates rise?
- The Fed continues to raise interest rates and will eventually liquidate bond holdings – Question: When and at what price?
- As interest rates rise, economic growth is likely to slow, which helps reduce inflationary pressures. Question: Will the economy finally fall into recession, the agreed-upon cure for ever-high inflation?
Bottom line: Don’t be in a hurry to become an optimist
It’s nice to see the publicity shake-up along with the silver linings and reasons to cheer. However, there are many other issues that need to be dealt with and their results unraveled. Beyond that, we need to see how this conflict between the Fed and inflation plays out — especially since the Fed hasn’t really started tightening.
Finally, the current stock market state (as of January 6th):
- NYSE has 1,673 listings – Nasdaq has 2,863
- Percentage under $1 billion market cap – NYSE = 32% – NASDAQ = 69%
- Non-Dividend Percentage – NYSE = 25% – NASDAQ = 56%
- Percentage with a share price of less than $5 – NYSE = 10% – NASDAQ = 36%
- Percentage with stock price 50% or more below 52-week high – NYSE = 17% – NASDAQ = 42% (and remember: a 100% upside is needed to make up for a 50% drop)