There’s no respite for bears.
Headed into the US jobs report, there were any number of NFP/UNR/AHE permutations that could’ve precipitated a downdraft in equities, or at least a pullback. None of them panned out.
True, the release had “something for everyone,” as I put it, in that those expecting a recession could say the headline masked evidence of a meaningful slowdown, but for equity bears on the wrong side of 2024’s “heads bulls win, tails bears lose” dynamic, that was no saving grace. Far from it: Bulls wanted evidence of a slowdown.
Bears were frustrated at every turn. The robust headline was tempered by revisions (so, the “‘no landing’ = hawkish Fed” bear case didn’t work), wage growth decelerated sharply, suggesting January’s overshoot was a fluke (so, “wage-price spiral risk = hawkish Fed” didn’t work either) and although the unemployment rate moved up, that was arguably good news to the extent it validated Jerome Powell’s rather emphatic reiteration (on Thursday) that notwithstanding warm reads on inflation in January, rate cuts are still very likely in 2024.
At one point headed into the weekend, the market was back to pricing ~100bps of Fed cuts for this year. So, four quarter-point reductions. Recall that as of late last month, pricing for 2024 had converged nearly to the 75bps tipped by the December dot plot.
Obviously, we’re still nowhere near the extremes seen in January, when overzealous traders were penciling in nearly 175bps of easing, but remember: The best case scenario is solid growth, ongoing job gains and ~75-100bps of insurance cuts, not a sharp growth deceleration and 150-200bps of panic cuts.
“[B]ig downward revisions, weak wages and rising unemployment suggest things are not quite as robust as the headline [jobs print] indicate[d],” ING’s James Knightley said Friday. “Moreover, lead indicators are clearly weakening and a slowdown looks to be on the way,” he added. “It’s not enough for the Fed to relax just yet, but we think things will be in place for a June rate cut.”
That’s exactly what you want if you’re a bull. You want gradual cooling and a Fed that has the plausible deniability it needs to commence cuts from mid-year. Anything that pulls the first cut forward to May would likely be bearish — an out-of-the-blue, Wile E. Coyote drop in payrolls, for example, or another NYCB. Anything that pushes the first cut beyond June (or July) would likely be bearish too — stubborn inflation, evidence of overheating, and so on.
If this sounds like a delicate balancing act to you, you’re not wrong. Not at all. There’s a reason virtually everyone doubted the Fed’s capacity to pull off the fabled “soft landing.” And to be sure, there’s a very real risk that the vaunted “wealth effect” still manifests in a services-sector inflation impulse that’s simply too persistent to make rate cuts feasible.
With that latter point in mind, note that Q1’s enormous equity gains come atop a veritable bonanza in Q4, when US households fortunate enough to own stocks enjoyed a $4.7 trillion windfall on their equity holdings.
For 2023 as a whole, the value of household equity holdings increased nearly $8 trillion.
The figure above, which incorporates this week’s update on household wealth, shows that with Q4’s gains, the cumulative windfall measuring from the COVID bear market lows stood at $21.1 trillion on December 31, 2023. That very nearly matched the 2021 “everything bubble” peak of $22.6 trillion.
Needless to say, Q1’s rally on Wall Street has pushed the total equity market windfall for households since the March 2020 COVID lows well beyond that $22.6 trillion figure.
Again: That’s something to keep in mind when you ponder the relative wisdom of a Fed that appears somewhat blasé regarding the potential pitfall (i.e., the upside risk to inflation) from the rekindled wealth effect.
