Stock market in ‘very dangerous’ position as jobs and wages run hot, fund manager says
A trader reacts as a screen displays the Fed’s rate announcement on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 31, 2024.
Brendan McDermid | Reuters
The US stock market is in a “very dangerous” spot as strong jobs numbers and wage growth suggest the Federal Reserve’s interest rate hikes have not had the desired effect, according to Cole Smead, CEO Smead Capital Management.
Nonfarm payrolls grew by 353,000 in January, new data showed last week, well above the Dow Jones estimate of 185,000, while average hourly earnings rose 0.6% on the month, two much more than the consensus forecasts. Unemployment was held steady at a historically low 3.7%.
The figures came after Fed Chairman Jerome Powell said the central bank was unlikely to cut rates in March, as some market participants had expected.
Smead, who has so far correctly predicted the U.S. consumer’s resilience to tighter monetary policy, told CNBC’s “Squawk Box Europe” on Monday that “the real risk this time is how strong the the economy has been” despite 500. basis points for raising interest rates.
“We know the Fed has raised rates, we know it caused a bank run last spring and we know that has damaged the bond market. – what term policy tools have they used?’” said Smead.
“Wage gains are still very strong. The Fed has not affected wage growth, which continues to affect inflation as we speak, and I look at growth wages as a very good indicator of future inflationary pressures.”
Inflation has slowed from June 2022’s pandemic-era peak of 9.1%, but the US consumer price index rose 0.3% month-on-month in December to bring the annual rate to 3.4%, also above consensus estimates and above Fed estimates. 2% target.
Smead argued that the drop in CPI should be attributed to “good luck” due to falling energy prices and other factors outside the central bank’s control, rather than the Fed’s aggressive cycle. of monetary policy tightening.
If the job market, consumer sentiment and household balance sheets remain strong, the Fed may need to keep interest rates higher for longer. This would ultimately mean that more and more listed companies would have to refinance at much higher rates than before and therefore the stock market may not benefit from strength in the economy.
Smead identified a period between 1964 and 1981 in which the economy was “generally strong” but the stock market did not benefit proportionately due to inflationary pressures and tight financial conditions, and suggested that the markets could be enters the same period.
The three major Wall Street averages closed Friday for their 13th winning week out of the last 14 despite Powell’s warning about rate cuts, as strong earnings from US tech titans such as Meta power more hope.
“Perhaps the better question is why is the stock market priced the way it is with the strength of the economy and the Fed finding they have to keep those rates high?” That’s a dangerous thing for stocks,” Smead said.
“And to follow on from that, the economic benefit that we see in the economy has very little to do with the stock market, it is not an advantage for the stock market. What did the stock market do stocks last year? Valuations went up. Did it have a lot to do with the earnings growth tied to the economy? Not at all.”
Rate cuts must be ‘more urgent’
However, some strategists have been keen to point out that recent data upside means the Fed’s efforts to plan a “soft landing” for the economy are coming to an end. result, and that a recession seems no longer in the cards, which could limit that. the downside for the wider market.
Richard Flynn, managing director at Charles Schwab UK, noted on Friday that until recently such a strong jobs report “would have set off alarm bells in the market,” but that no longer appears to be happening. .
“And while lower interest rates would certainly be welcome, it is increasingly clear that markets and the economy are responding well to the high-rate environment, so investors may be feel that the need for monetary policy is less urgent,” he said.
“[Friday’s] figures could be another factor delaying the Fed’s first rate closer to the summer, but if the economy maintains its comfortable path, it may not be a bad thing that’s it.”
This was echoed by Daniel Casali, chief investment strategist at Evelyn Partners, who said the bottom line is that investors are becoming “a little more comfortable that central banks can balance growth and inflation.”
“This unusual macro backdrop is relatively supportive for stocks,” he said.