The Economic Reports That Rocked Wall Street Dear Tejas, It’s possible that no official ruins a Wall Street party better than Federal Reserve Chairman Jerome Powell.
From February 24 to March 6, the S&P 500, Dow and NASDAQ rallied about 2% higher, while the NASDAQ climbed 2.5%. However, that rally came to an abrupt halt on Tuesday after Powell stepped into the Congressional “lion’s den” to provide the Fed’s semiannual monetary policy report to the U.S. Committee on Financial Services on Tuesday and Wednesday.
Wall Street had hoped that he would provide dovish commentary that would hint that the Fed was planning to tap the brakes on its aggressive interest rate policy soon.
Unfortunately, those hopes were dashed on Tuesday – causing the S&P 500, Dow and NASDAQ to fall 1.53%, 1.72%, and 1.25%, respectively – as some of Powell’s prepared statements were decisively hawkish.
Specifically, he noted that “the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy.”
In addition, if economic data remains hot then the Fed “would be prepared to increase the pace of rate hikes. Restoring price stability will likely require that we maintain a restrictive stance of monetary policy for some time.”
Translated from Fedspeak: More rate hikes are likely, and the increases could be in bigger increments to curb inflation.
In recent weeks Wall Street was expecting March’s rate hike would be only 25 basis points. But following Powell’s hawkish commentary, the odds that the Fed hikes key interest rates by 50 basis points have exploded to 79.4%.
In today’s Market 360, we’re going to dive into this week’s economic data – more specifically this morning’s long-awaited payroll report. I’ll share what I think it means for the Federal Open Market Committee (FOMC) meeting later this month… and where you should stash your investing dollars right now… The February Payroll Report Ahead of this morning’s payroll report, I was expecting a downward revision to the January payroll numbers.
I believed January’s outrageously high numbers were being artificially boosted by massive seasonal adjustments.
You may recall, the January nonfarm payroll employment number came in at 517,000 – far higher than the 187,000 estimates. This suggests that the Fed’s rate hikes haven’t put a dent in the U.S. jobs market, signaling more upward pressure on inflation… and further rate hikes.
The fact is, January is the worst month for seasonal adjustments. As The Wall Street Journal pointed out – since “companies let go of holiday workers” January has substantial seasonal adjustments.
From The Wall Street Journal: Did the U.S. add half a million jobs in January or did it lose 2.5 million?
The government said both happened—but investors and policy makers cared about the seasonally adjusted increase of 517,000…
Throughout the year, consumers and firms alter their behavior, buying coats in the winter and hot dogs in the summer, and stocking folders for back-to-school season. That changes prices and when hiring and layoffs happen.
Government statistical agencies use complex models developed over decades to account for these patterns to make month-to-month comparisons possible.
That arcane process received more attention recently as some economists questioned if strong seasonally adjusted hiring, price and spending data to start the year accurately reflect what’s going on in the economy. And following this morning’s February payroll report, I was right…
The Labor Department did grossly exaggerate the January payroll report due to extraordinary seasonal adjustments. This morning, the Labor Department revised both its December and January payroll reports to 239,000 (down from 260,000) and 504,000 (down from 517,000), respectively.
The February payroll report came in a 311,000, which was substantially better than economists’ consensus estimate of 225,000. However, despite robust payroll job growth, the unemployment rate rose to 3.6% in February, up from 3.4% in January.
The labor force participation rate increased to 62.5% in February, up from 62.4% in January. Average hourly earnings only rose 0.2% in February to a 4.6% annual pace, down from a 4.8% annual pace in January. Lower wage growth will keep the Fed happy and may cause them to raise key interest rates less than previously anticipated.
On Wednesday, we received the ADP National Employment Report, which only covers private household, non-farm employees. In February, private payrolls rose 242,000, compared to the 209,000 expected.
While both reports show that we are still creating jobs – they proved that numbers aren’t as robust as we’ve been led to believe.
Further proof of that was Thursday’s weekly jobless claims. The data showed a 10% increase in jobless claims last week – the largest rise in five months. And while this is still below the pre-pandemic 2019 number, its notable that, as reported by The Wall Street Journal, “Job openings in January dropped from December’s 11.2 million, coinciding with some private-sector data showing that early signs of demand for U.S. workers is cooling.”
It’s a lot to digest.
But the bottom line is this: The Fed may have less reason to continue its rate hike campaign as the data shows signs of slowdown.
There is a lot more data coming ahead of the next meeting. Next week we have the Consumer Price Index (CPI) for February on Tuesday and February’s retail sales and Producer Price Index (PPI) on Wednesday.
So, there is still quite a bit of fear ahead of the FOMC meeting on March 21 and March 22. One thing that will be telling is the FOMC’s “Dot Plot” survey – which the Fed releases every other meeting. This will tell us where the Fed officials think rates need to be.
Once we have an idea of where the Fed is heading, stocks will be able to digest the news and settle. Until then, I expect market will continue to oscillate as investors try to predict what the Fed is going to do next. Here’s What To Do While We Wait It’s simple. Invest in high-quality growth stocks.
As I like to say, in the midst of market uncertainty, an investor’s best defense remains a strong offense of fundamentally superior stocks – like the ones I follow in Growth Investor.
My Growth Investor stocks are characterized by 38.9% average annual sales growth and 283.8% average annual earnings growth. I should add that my Buy List stocks are only trading at 7.6X median trailing earnings, and my average dividend yield is 3.93%. So, low price-to-earnings ratios and strong dividend growth coupled with positive sales and earnings should support my stocks in the upcoming months.
Click here to join Growth Investor today and receive full access to my Growth Investor Buy Lists. Sincerely, |
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