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We may need an addition to the old adage that there are decades when nothing happens and weeks when decades happen. Apparently there are weeks when no one knows what happened… last week was one of them.
The deceleration in Fed rate hikes slammed straight into a Bureau of Labor jobs report, so ridiculously and unexpectedly “positive” – arguably evidence the economy is still white-hot – it shook everyone’s underlying outlook. Now short sellers are scrambling for cover while blue chip companies anticipate their first earnings decline in years, and the one thing everyone is sure of is that there is no such thing as certainty anymore. In other words: Happy Monday.
More Powell for you
The January jobs report saw 517,000 new nonfarm payrolls versus the 187,000 many had expected, taking the unemployment rate to 3.4%, its lowest level since 1969. Whether this is evidence the economy is recovering is almost beside the point . For Jerome Powell, it’s proof that the economy can withstand the future rate-hike hits, which he continues to stress are yet to come.
All in all, if there’s one person in all this chaos who can even pretend to know what they’re doing, it’s Powell himself. Navigating the unknown path to a soft landing as inflation cools , without weakening the overall economy, doesn’t come without a fair share of rear seat drivers. Virtually half of Wall Street believes its rate hikes have slowed progress, while the other half contends that cutting rate hikes too soon could eventually send the economy into 1970s-style stagflation. But some simple data suggests we might be headed in the right direction: Since the start of the fourth quarter, the S&P 500 index is up 15%, close enough to smell the sweet whiff of a bull run after a 20% surge.
The result? A burst of head-scratching Wall Street and nothing close to consensus:
- According to FactSet data, companies in the S&P 500 are forecast to see earnings fall by over 5% year-on-year, the biggest drop since the third quarter of 2020. John Butters, FactSet’s senior analyst, told the Financial Times that companies are on the right track their worst performance against expectations since 2008. Yikes.
- And yet the market is strong enough to outperform companies with short sales as the market steadily recovers. The suddenly glass-half-full crowd just executed their biggest burst of short-covering since November 2015, the FT reports.
Summertime: At least one prominent bear has turned cautiously optimistic. Lawrence Summers, who once spoke in apocalyptic terms about the macroeconomic landscape, struck a different tone in an interview with CNN’s Fareed Zakaria this weekend: “I would say I’m encouraged, but I still think it was a mistake would be to say we’re out of the woods.” Like a lost wanderer, he just has to keep whistling.
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