236,000 Jobs – The Fed is terrified of making this mistake

By David Nelson, CFA CMT

How you spin a story is often more important than the story itself. It’s certainly that way in politics. All you have to do is flip through your news channels on your cable box. The same story on Fox is going to look and sound a lot different than it does on MSNBC or CNN.

It’s kind of like that in the stock market, negative economic data one week might get a positive price reaction in the market.

Investors sometimes translate the weak data into holding back the Fed from hiking further. They call this a bad news is good news scenario. Or just the opposite happens when the data is hotter than expected. Stocks head south. The implication being the Fed will translate the hot data into inflation and will slam on the brakes. Suddenly. Good news is bad.

Is good news going to be bad? Bad going to be good or will bad news be bad news? That’s always the challenge investors face. Last week bad news was mostly bad news. Manufacturing and services ISM data were softer than expected. Manufacturing is clearly falling off a cliff and services are barely in expansion territory.

ISM Manufacturing – 46.3 (Below 50)

Bloomberg Data

It’s not surprising that investors scrambled into the safety of large cap secular growth stocks like Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL). Defensive sectors like healthcare and utilities also did well. Energy has been the wild card all year putting in a strong week on the heels of OPEC announcing a production cut.  

As for the mega cap price momentum, these are companies with fortress like balance sheets with little need for credit or banking to fund working capital. In the middle of an ongoing banking crisis the outperformance isn’t surprising.

The time to get out of these names will be the first signs of an economic acceleration. At that point investors will move down the valuation and capitalization curve to buy growth at a cheaper price.

Growth can be the most expensive when there isn’t any.

Non-Farm Payrolls March

Bloomberg Data

On Friday non-farm payrolls came in at 236,000. That was pretty much in line with estimates, but the unemployment rate fell to 3.5%.

It’s the services sector that’s key. Leisure and hospitality were 72,000, down from the 95k average, but we’re still 2% below pre-pandemic levels. Service jobs are still climbing, and that’s probably a negative for this Fed. It’s important to note that the survey week was before the blowup of Silicon Valley and Signature banks.

It was thin trading on Good Friday. Only the bond market was open for a shortened session, but already markets are pricing in a higher probability of another Fed hike at the next meeting.

My take

I don’t deny that we have significant challenges. We have a Fed that is pushing too far. They’ve already broken a few banks. We have an administration that is more concerned about optics and checking off boxes than serving the American people.

Every corner of the planet is a geopolitical hot spot and finally, we have a debt ceiling confrontation as the president continues to stonewall House Speaker McCarthy on spending. Yeah, I get it. All bad stuff.

S&P 500 2 Years

Bloomberg Data

However, when I see that half the financial community is calling for a market crash and yet the slope of the 200-day moving average of the S&P 500 is turning higher for the first time in close to a year. Maybe, just maybe the market knows something.

S&P 500 Close-up

Bloomberg Data

I think we’ve been in a rolling recession as the economic fallout seems to hit one sector at a time. When tech is falling out of bed, health care or some other defensive sector picks up the slack. Hence the positive performance year to date.

Maybe it’s a mirage. In six months, we’ll know if I’m drinking water or sand.

Open letter to Jay Powell
Here’s some advice to Fed Chair Jay Powell. I get the fact that the Fed is terrified of repeating the mistakes of the seventies and early eighties. Back then, Chairman of the Fed, Arthur Burns, was running an expansionary policy to combat rising unemployment. They eased financial conditions too soon and inflation came roaring back.

The seventies and early eighties, that was a dark time for the nation and investors. You had two major oil price shocks. The first was the OPEC oil embargo, triggered by US support for Israel during the Yom Kippur War. The second was the Iranian Revolution in 1979.

I think today’s inflation is a bit different. Massive liquidity injections and out of control spending by government forced M2 to balloon higher and of course today on the heels of fed tightening have gone negative year on year.


Bloomberg Data

What makes this different is the following. In addition to all of the above, we had massive supply shocks coming out of COVID. Remember those pictures of ships lined up as far as the eye could see, all waiting to dock and unload? That’s gone. Our biggest ports of entry, like L.A., Long Beach, New York and New Jersey are wide open.

Ports are open

According to Kip Louttit, executive director at the Marine Exchange of Southern California; there’s been no backup off of Los Angeles and Long Beach since November last year.
What’s priced in

Bloomberg Data

Odds of a quarter point hikes are now 68%, and that’s up from 50% early last week. Jay, give it a rest. The market is already pricing in cuts later this year.

I’m not sure you should do that, but I am certain you should pause at the intersection and look both ways before getting slammed by another economic crisis.

Look, if the inflation data stops going down, hit the brakes again. I’ll be in your corner. The saying goes the Fed hikes until something breaks. Well, something broke. Give it a rest before you break something even bigger.

*At the time of this article some funds managed by David were long AAPL, MSFT & GOOGL.