While the US stock market has been pricing in a “soft landing” scenario for the economy, a strong January jobs report, relatively strong corporate earnings, and Federal Reserve Jerome Powell’s comments over the past week could point to a possible “soft landing.” “, where the economy is resilient while inflation remains on target.
Such a scenario could be positive for US stocks, as long as inflation remains steady, according to Richard Flax, chief investment officer at Moneyfarm. However, Flax said in a phone call that if inflation accelerates again, the Fed may be reluctant to cut the interest rate too much, which could lead to problems.
What the last week tells us
Investors just had their busiest week so far this year for economic data and corporate earnings reports, with stocks finishing at or near their record levels.
The Dow Jones Industrial Average (DJIA) ended the week with its ninth record close of 2024, according to Dow Jones Market Data. The S&P 500 SPX posted its seventh record close this year on Friday, while the Nasdaq Composite COMP was down about 2.7% from its peak.
The Federal Reserve kept interest rates unchanged in a range of 5.25% to 5.5% at its meeting on Wednesday, as expected. However, in the subsequent press conference, Fed Chairman Jerome Powell threw cold water on market expectations that the central bank may start cutting its key interest rate in March, and stressed that they wanted “greater confidence” in the fight against inflation.
Roger Ferguson, a former Fed vice chairman, said Powell introduced “a new kind of risk, a downside risk.”
In this scenario, inflation would stop falling, while the economy would be strong, Ferguson said in an interview with CNBC on Thursday. However, Ferguson said he did not believe that was the likely outcome.
Traders were anticipating a 20.5% chance on Friday that the Fed would cut interest rates at its March meeting, according to the CME FedWatch tool, that's down from a 46% chance a week ago. The probability that the Fed will begin its rate-cutting program in May stood at 58.6% on Friday.
Flax said stronger-than-expected January jobs data released on Friday eliminates the chance of a rate cut in March.
The US economy added 353,000 new jobs in January, while economists polled by the Wall Street Journal expected an increase of 185,000 new jobs. Hourly wages rose 0.6% in January, the largest increase in nearly two years.
Last week was also full of earnings reports, with several tech giants including Microsoft MSFT,
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and Amazon AMZN,
It announced its financial results for the fourth quarter of 2023.
Of the 220 S&P 500 companies that have reported earnings so far, 68% have beat estimates, with earnings beating expectations by an average of 7%, Fundstrat analysts wrote in a note on Friday.
Jose Torres, chief economist at Interactive Brokers, said that while earnings reported by major technology companies were “good,” the guidance was not.
Torres said in a phone interview that what has been driving the rise in technology stocks since last year has mostly been the potential for sales from artificial intelligence products, but technology companies are not able to monetize that trend yet.
Adding to the headwinds are returning concerns about regional banks.
On Thursday, shares of New York Community Bancorp Inc. In the biggest decline in regional bank stocks since the Silicon Valley bank collapse in March 2023. New York Community Bancorp on Wednesday reported a surprise loss and cited challenges in commercial real estate. The sector suffering from non-performing loans.
Meanwhile, the Fed's term financing program, which was launched in March last year to boost the capacity of the banking system, will expire on March 11.
If the Fed can start cutting its key interest rate in March, it will be “like an ambulance that will pick up regional banks and save them,” Torres said. “Now the ambulance will come in May at the earliest, and I think we are in a particularly risky period between now and May,” Torres said.
What should investors do?
Investors should stay away from risk before May, according to Torres. “Last year, commodities and commodities helped a lot on the anti-inflation front. This year, for inflation to continue to decline, we will need services to start contributing to that. Then we will need to see an increase in the unemployment rate,” Torres said.
He said he prefers US Treasuries of four years or less, as longer-term bonds may be vulnerable to risks related to fiscal deficits and government borrowing. He said that for stocks, he prefers the health care, utilities, consumer goods and energy sectors.
Keith Buchanan, senior portfolio manager at Globalt Investments, is more optimistic. He said that the slowdown in inflation and the relatively strong economic data and profits “do not paint a true picture of a risk-off scenario.” “The risk asset setup remains skewed toward the bullish outlook,” Buchanan added.
Next week, investors will watch services sector data from the ISM on Monday, the US trade deficit on Wednesday, and weekly initial jobless claims numbers on Thursday. Several Fed officials will also speak, which could provide more clues about the likely path of interest rate cuts.
