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Digging For Bad News

CAMS Weekly View from the Corner – Week ending 1/16/2023

January 9, 2023

Within these editions in the latter part of 2022 we went full-tilt Federal Reserve specifically focusing on every word uttered and any word written by Chairman Powell and others who make up the Federal Open Market Committee (FOMC) which is the actual body within the Fed that sets interest rate policy. All the way to the end of 2022 their message and actions were relentlessly anti-price inflation.  They iterated time and again they are focused on their 2% price inflation target (which is far south of current readings) and will not let up on their price inflation focus “….until the job is done” to quote Chairman Powell. Along the path of latter 2022 the Chairman laid out a wealth of details and economic inputs that lay beneath price inflation.  It has been their view via their consistent messaging that these various measures will need to soften before we can expect inflation to point down toward their 2% target. In collective market participant language we can sum up all the shared details from the Chairman with the phrase “bad news” which equates to softening economic data (the softer the better it appears) that will then prompt the Fed to first stop raising rates and second to pivot and begin lowering interest rates. Bad News Becomes Celebrated Good News With the above we have fully entered the strange environment where weak economic data will be celebrated as good news by collective market participants in the belief that with every piece of weak economic data we are one step closer to the Fed walking away from their price inflation fight. What this does not assure is whether the actual price inflation issue will be reduced to the level that makes the Fed feel they have won the inflation battle With this, how much truly bad news will it take to achieve their inflation target and if it has to notably devolve (think hard recession) will collective participants be willing to celebrate that level of really poor data all the way down to the bottom?  Doubtful – very doubtful. Imagine listed stock market companies reporting terrible earnings releases (remember earnings are ultimately the lifeblood of a company’s value and hence stock price) while you-name-it general economic indicator is tanking while price inflation, albeit lowering, remains stubbornly high – think far north of 2%. That type of “bad news” environment may actually be bad news whereby participants themselves say – “that’s too much for us” – and push stock prices southbound rather than the current developing view of welcoming bad news and then reactively bidding up market prices. We Suspect They Want “Bad News Light” Similar to a pub patron who is offered a full bodied German stout beer only to recoil and replies with a request of (insert your favorite) American light beer – don’t get them wrong they want a beer but only the watered down version. In this vein, looking out into the near-term, we suspect collective participants want the “bad news light” choice rather than the truly stout version of bad econ news that consists of terrible company earnings and very weak economic data. To this thought we have had a quite interesting first week of the New Year where participants seemed determined on digging for bad news regardless of the actual result.  A Bevy of Employment Related Releases One of the price inflation underpinnings that Chairman Powell shared in detail latter 2022 related to the employment market.  In a nutshell he stated there continues to be a robust employment market coupled with a lack of enough willing laborers which feeds through to wage rates growing above what would be consistent for a 2% price inflation backdrop. This past week we seen a plethora of employment related data points.  Pointing to some the Job Openings and Labor Turnover Survey (JOLTS) reflected 10.5 million unfilled openings.  For perspective we have remained north of 10 million Openings dating back to early summer 2021 which has been historical record territory.  For further perspective, the previous historical high range was 7.5 million dating back to 2018.  Our current reading remains very high – little “bad news” on this front. In addition, last week we seen ADP’s (private payroll processor) employment numbers in December grew by 235,000 new jobs while the Bureau of Labor Statistics (BLS) monthly employment survey reported 223,000 new jobs had been created in December – both higher than expected.  The well recognized Unemployment Rate came in at 3.5% – lower than expected and continuing to post multi-decade low levels. Weekly Unemployment Insurance Claims posted 203,000 new Claimants – lower than expected and for perspective the lowest since 1969.  In addition, Continuing Claims (those claiming benefits past their initial week) posted 1.7 million which continues with multi-decade low levels – both metrics chiming in on a still strong employment backdrop. It’s as Though They are Saying:  There Has to be Some Bad News in Here Somewhere In keeping with the general observation of this edition it seemed collective participants went digging anywhere they could within the employment landscape (in particular being Powell pointed to some specific employment metrics as a focus of the Fed’s FOMC) to ferret out some “bad news” which could then be treated as good news by bidding stock prices higher with an extrapolation that this means the Fed is all but done with the price inflation battle.  They found some in the year-over-year wage growth rate in that it had been running in the 5% area but dipped to 4.6%.  For perspective in December of 2021 – one year ago – that employment report reflected 4.8% wage growth rates and then went higher from there and remained high through 2022.  As they say one data release does not make a trend.  We suspect for a real downward trend to develop in wage growth rates we will need to see the litany of employment related indicators shared above actually post some consistent negative news or a massive increase in people willing to search for employment. Welcome to 2023 If the above leaves you with your head spinning just a bit we offer a welcome mat to 2023.  This year, in particular the first several months, we suspect will be a head spinning experience when it comes to markets and everything related.  We suspect every time you think you are on top of what is happening and why it is happening in markets the dynamics will change.  Right now, “bad news light” is the collective market participant’s creed in our view but if that version of bad news goes full stout we seriously question how much they will be willing to celebrate that in particular if price inflation simultaneously remains well north of 2%. Welcome to 2023 it promises to be one heck of a year throughout markets! I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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