The U.S. stock market is definitely facing some interesting times as data continues to reveal a persistently strong economy despite the Federal Reserve’s interest rate hikes. The latest numbers show that nonfarm payrolls surged by 353,000 in January, which is way above the Dow Jones estimate of 185,000. At the same time, average hourly earnings leaped by 0.6% monthly, which was double the consensus forecasts, and the unemployment rate remained at a historically low 3.7%.
All this has led to concerns raised by Cole Smead, CEO of Smead Capital Management, that the stock market might be in a “very dangerous” spot. Despite the Fed’s efforts to dampen growth with interest rate hikes, the economy seems to be stronger than ever. According to Smead, the real risk lies in just how robust the economy has been despite a 500-point basis in interest rate hikes.
One of the key indicators of the economy’s resilience is the sustained gains in wage growth. The Fed’s monetary policy has not been able to rein in wage growth, which continues to outpace inflation. While inflation has slowed from its peak, the U.S. consumer price index climbed by 0.3% in December, raising concerns about inflationary pressures going forward.
Smead attributes the fall in CPI to factors outside the Fed’s control, such as falling energy prices, rather than an effect of the Fed’s aggressive monetary tightening. The concern is that if the jobs market, consumer sentiment, and household balance sheets remain robust, the Fed may have to keep interest rates higher for longer, which could mean more challenges for listed companies and a stagnant stock market.
In fact, Smead has pointed out that between 1964 and 1981, the economy was strong, but the stock market didn’t proportionately benefit due to inflation and tight monetary conditions. There’s a risk that the markets could be entering a similar period now. The recent winning streak of the Wall Street averages can be deceiving, especially given the flimsy ties between the stock market and economic prosperity. Smead’s concern is whether the stock market can sustain its high valuations in the face of a resilient economy and high interest rates.
Despite these concerns, there are some voices in the market who see a silver lining. Some strategists believe that the recent surge in economic data is evidence that the Fed’s efforts to engineer a “soft landing” for the economy are working and that a recession is no longer in the cards. This could limit the downside for the broader market.
Richard Flynn, managing director at Charles Schwab U.K., believes that the strong jobs report might delay the Fed’s first rate cut closer to summer but doesn’t necessarily see this as a bad thing. Meanwhile, Daniel Casali, chief investment strategist at Evelyn Partners, maintains that investors are becoming “a little more comfortable that central banks can balance growth and inflation,” which is relatively constructive for stocks.
In conclusion, the U.S. stock market is definitely going through a tumultuous period, with economic indicators painting a mixed picture. Investors will need to keep a close eye on how the Fed responds to the current economic strength and what implications this has for interest rates and the stock market overall.
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