Wall Street fortunes this year may depend less on what happens to high-paid workers in San Francisco’s teetering tech sector and more on a familiar part of American life: the working class.
Investors wondering if it’s time to buy struggling stocks have seen hopeful signs that the cost of living in the US is falling from its highest level in 40 years. The bulls took another shot in the arm on Friday after a robust December jobs report also showed slowing wage growth.
The Dow Jones Industrial Average DJIA, +2.13% posted a gain of 700 points, while the S&P 500 Index SPX, +2.28%, and the Nasdaq Composite COMP, +2.56% suffered a four-week losing streak.
The problem? While the Fed has been raising interest rates rapidly since March, the central bank has yet to find a way to cool the economy, but not too much, and end a vicious cycle where high wages may be feeding painful rates of inflation for years to come.
“It’s still important to stay on top of things,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, in a phone interview on Friday. “Wages are still high.”
Against this backdrop, she believes that unemployment needs to rise for the Fed to get back on track to its 2% annual inflation target and that the US will enter a mild recession.
“It’s far too early to claim victory.”
Tech is not the economy
Technology companies, a major source of pandemic-related stock market gains, have begun to endure the plague of layoffs.
Amazon.com Inc. AMZN, +3.56% this week, confirmed an overall cut of 18,000, while Salesforce Inc. CRM, +3.06%, said it would cut its workforce by about 10%, resulting in a A deluge of pink slips was added over many of the biggest names in the art
read: Here are the companies in the spotlight of the layoffs: Amazon joins Salesforce, Intel, Google, HP, Cisco
But forces hitting the tech sector aren’t painting a full picture of the job market. Friday’s payroll report showed that the US economy added 223,000 jobs in December, while the unemployment rate was 3.5%, its lowest level since 1969. Additionally, hourly wage gains have been modest, raising hopes that workers’ wages could level off and potentially broaden the economy to stave off a recession.
A word of caution: As with the Fed’s main indicator of housing inflation, the central bank has traditionally focused on jobs statistics, which are backward-looking to help guide monetary policy.
Another aspect was that a decade of low interest rates and a spate of pandemic fiscal and monetary stimulus made this economic slowdown seem anything but ordinary.
In contrast to previous periods when the economy seemed primed for a recession, Steven Blitz, chief US economist at TS Lombard, noted that this slowdown has caused higher-paying “white-collar” jobs to deteriorate, which is Friday paved the way for slower job growth, note to clients.
There are several reasons why investors should take notice. “The only thing we’re seeing is the massive dichotomy in different sectors of the economy,” Allie Kelly, chief marketing officer at Employ Inc., a large provider of real-time hiring data, said in a phone interview.
While high-paying tech and finance companies have been in the headlines for layoffs, “the reality is that tech companies only make up about 2% of our total jobs,” she said. “Recreation and hospitality are growing at a rapid pace,” she said, adding that another notable feature is the growth in construction jobs despite the slump in the housing market.
“I think we’re doing ourselves a disservice if we don’t look under the hood of the job market,” Kelly said.
Who has jobs is important
Fed Chair Jerome Powell has been heavily focused on raising hourly wages by nearly 5% lately as consumer inflation data has softened, suggesting the worst inflation since the 1980s may be over.
Stephen Dover, chief markets strategist and head of the Franklin Templeton Institute, said that while inflation is the top concern for investors in 2022, how people will be paid going forward and who is affected by unemployment should be key areas of focus in the months ahead.
“It has implications for how we invest and what companies will do well,” Dover said.
Goldman’s Wilson-Elizondo said she still expects the impact of the Fed’s higher interest rates to become more apparent in upcoming corporate earnings reports, potentially creating hot spots in credit markets as it drains more liquidity from the system.
“One of the trickier aspects of the Fed’s data dependency is that if it doesn’t come out as expected, every blip that comes out will lead to bigger volatility in markets,” she said.
Investors will be tuned in next week for December’s CPI, due out on Thursday, with the full-year rate expected to fall to 6.6% from 7.1% in November, a fall from a peak of over 9% in the summer. You will also hear from several US central bankers, including Chair Powell, who is speaking in Sweden on Tuesday.
This week, the S&P 500 and Dow both posted their best weekly percentage gains in six weeks, up 1.5%, according to Dow Jones Market Data, while the Nasdaq Composite rose 1%.