by Hubert Marleau, Market Economist, Palos Management
March 9, 2024
Sessions of geopolitical turmoil or domestic political strife usually do not derail the path of the economy or upset the flow of investment money, unless these sort of events disrupt supply chains, trade or the global energy complex. While I'm reading up on these risks, I don’t allow them to change my view of the stock market - until it becomes a must. Speculators rather hedged these haphazard issues with purchases of Bitcoins and Gold, explaining their mysterious and spectacular price performance over the past several weeks, than walk away from the financial markets. Bond yields are down and stock prices are up.
The week ended on March 10 was jam-packed with employment data that suggests the inner dynamics of the labour market is settling down, productivity is still rising and inflation is cooling. Job openings fell only 26,000 to 8.86 million in January, while the quit rate, the number of workers quitting their jobs, dropped to 2.1%, the lowest since August of 2020. An occurrence which should help moderate wage inflation and boost productivity. On Friday, the BLS reported that Non Farm Payroll (NFP) rose a healthy 275,000, but not enough to contradict the ISM release that said employment is not rising as fast as the 2.5 % increase that the Atlanta Fed NowCasting model is projecting for Q1/24 and suggesting that the trend in productivity is moving in the right direction. Why? The January and December employment gains were revised to a much lower amount than previously printed.
The Business Roundtable’s quarterly gauge of CEO sentiment is strikingly confident about the economy. As a rule, CEOs are planning to increase capital spending in robotics, factories and digital equipment, a sign that the rip-roaring hiring rates are being replaced with more modest employment plans. Meanwhile, average hourly earnings rose only 0.1% in February, suggesting that inflation pressures were subdued.
In this respect, the Federal Reserve Chair Jerome Powell was tenacious in reinforcing his message, under a barrage of questioning from lawmakers in Congress, that the central bank is in no rush to cut interest rates, but adding that it will likely be appropriate to lower borrowing costs at some point this year. Raphael Bostic, President of the Atlanta Fed, thinks that the economy will need 2 rate cuts this year. The point here is that the comeback in productivity is making it feasible for the economy to grow even though the policy rate (5.38%) is above the neutral one ( 4.00%).
Given that there’s no evidence or no reason to think that the economy is about to fall into a recession, the market has embraced a new bullish narrative. Indeed, it's better to have one that is strong even with higher interest rates than one that is weak with lower interest rates. Thus, the rally is broadening because it has become easier for investors to focus on company
fundamentals and earnings growth. Wall Street analysts’ bottom-up forecast is for 11% S&P 500 earnings per share growth in 2024 and 13% in 2025. This comes to $282 a share in 2025 with a P/E ratio of 18.0x with no recession in sight. Two weeks ago, I raised my forecast for the S&P
500 to 5500. There are, for sure, a few signs of madness. However, for now the usual accompaniments to a genuine bubble are missing. It closed at 5124 on Friday, March 10, 2024, amid profit taking from traders.
P.S. 2 I’m on a cruise ship until March 22. There will be fewer letters (unedited plus short and sweet.)
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