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Why a stock market obsessed with fighting Fed inflation should focus on Main Street jobs in 2023


Wall Street’s fortunes this year may hinge less on what happens to well-paid workers in San Francisco’s faltering tech sector and more on a familiar part of American life: the working class.

Investors wondering if it’s time to buy troubled stocks saw encouraging signs in the cost of living in the United States falling from its highest level in 40 years. The bulls received another shot in the arm on Friday after a strong jobs report for December also showed slowing wage growth.

The Dow Jones Industrial Average DJIA,
recorded a gain of 700 points, while the S&P 500 SPX index,
and Nasdaq Composite COMP,
snapped a four-game losing streak.

The problem? While the Fed has been raising interest rates rapidly since March, the central bank still needs to find a way to cool the economy, but not too much, and end a vicious cycle where high wages are fueling levels of unemployment. painful inflation, potentially for years to come.

“It’s always important to keep perspective,” Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management, said in a phone interview Friday. “Wages are still high.”

Against this backdrop, she believes unemployment needs to rise for the Fed to get back on track with its 2% annual inflation target, and for the US to enter a mild recession.

“It is far too early to claim victory.

Technology is not the economy

Tech companies, a major source of pandemic stock gains, have turned to the scourge of layoffs. Inc. AMZN,
this week confirmed total reductions of 18,000, while Salesforce Inc. CRM,
said he would cut his staff by around 10%, adding to a barrage of pink slips on many of the biggest names in tech.

Read: Here are the companies in the spotlight: Amazon joins Salesforce, Intel, Google, HP, Cisco

But the forces hammering the tech sector don’t paint a complete picture of the labor market. Friday’s payrolls report showed the US economy added 223,000 new jobs in December, while the 3.5% unemployment rate hit its lowest level since 1969. the economy to avoid a recession.

A word of warning: As with the Fed’s main indicator of housing inflation, the central bank has traditionally focused on backward-looking labor statistics to help shape monetary policy.

Another facet has been that a decade of low interest rates and a deluge of pandemic fiscal and monetary stimulus have made this economic downturn look anything but ordinary.

Unlike previous periods when the economy seemed primed for a recession, Steven Blitz, chief U.S. economist at TS Lombard, noted that this slowdown has led to a deterioration in better-paying “white-collar” jobs, which has paved the way for weaker job growth, in a Friday Client Note.

There are several reasons why investors might want to take notice. “The one thing we’re seeing is the massive dichotomy across different sectors of the economy,” Allie Kelly, chief marketing officer at Employ Inc., a large-scale provider of real-time hiring data, said during an interview. a telephone interview.

While high-paying tech and finance companies have made headlines for layoffs, “In reality, tech companies only make up about 2% of our total jobs,” she said. “Leisure and hospitality are growing furiously,” she said, adding that another quirk has been the growth in construction jobs, even with the housing market crashing.

“I think we’re doing ourselves a disservice by not looking under the hood of the job market,” Kelly said.

Who has jobs counts

Fed Chairman Jerome Powell’s recent emphasis on hourly wage increases of nearly 5% comes as consumer inflation data has been more subdued, suggesting the worst inflation since the 1980s could be past.

Stephen Dover, chief market strategist and director of the Franklin Templeton Institute, said while inflation was the biggest issue for investors in 2022, how people get paid in the future and who is impacted by unemployment should be the main areas of interest in the months. ahead.

“It has implications for how we invest and what companies will do well,” Dover said.

Goldman’s Wilson-Elizondo said she still expects the effects of the Fed’s interest rate hike to show up more acutely in future corporate earnings reports, and potentially in the future. Emergence of pockets of stress in credit markets as they drain more liquidity from the system.

“One of the hardest parts of the Fed being data-dependent is that every dot that comes out will cause bigger swings in the markets, if that’s not what’s expected,” she said.

Next week investors will be glued to the December consumer price index due on Thursday, with the headline annual rate expected to fall to 6.6% from 7.1% in November, a pullback from its peak above 9% in summer. They will also hear from several US central bankers, including President Powell on Tuesday in Sweden.

For the week, the S&P 500 and Dow posted their best weekly percentage gains in six weeks, up 1.5% each, according to Dow Jones Market Data, while the Nasdaq Composite rose 1%.




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