Why a stock market obsessed with the Fed’s inflation fight should focus on Main Street jobs in 2023

Wall Street’s fortunes this year may depend less on what’s happening to high-wage workers in San Francisco’s tech sector and more on a familiar part of American life: the working class.

Investors wondering whether it’s time to buy battered stocks have seen hopeful signs in US living costs falling from a 40-year high. Bulls got another shot in the arm on Friday, as a strong jobs report for December also showed slowing wage growth.

The Dow Jones Industrial Average DJIA, +2.13% booked a 700-point gain, while the S&P 500 SPX, +2.28% and Nasdaq Composite COMP, +2.56% snapped a four-week losing streak.

The problem? While the Fed has raised interest rates quickly since March, the central bank still needs to find a way to cool the economy, but not too much, and an end to a vicious cycle where high wages fuel painful levels of inflation, potentially for years. in turn. to come.

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

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

“It’s too early to claim victory.”

Technology is not economics

Technology companies, a major source of pandemic stock market gains, have been braving the blow of layoffs.

Amazon.com Inc. AMZN, +3.56% this week confirmed total cuts of 18,000, while Salesforce Inc. CRM, +3.06% said it would cut its staff by about 10%, adding a flurry of pink slips to many of the biggest names in tech.

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

But the forces hitting the tech sector don’t paint a full picture of the job market. Friday’s payrolls report showed the U.S. economy added 223,000 new jobs in December, while the unemployment rate of 3.5% matched the lowest level since 1969. Additionally, hourly wage gains were modest, sparking hope that wages for workers could be leveled, potentially allowing the broader economy to avoid a recession.

A word of caution: As with the Fed’s main gauge of housing inflation, the central bank has traditionally focused on lagging job statistics to help shape monetary policy.

Another aspect has been that a decade of low interest rates and a deluge of pandemic fiscal and monetary stimulus has made this economic slowdown seem anything but ordinary.

Unlike previous periods when the economy looked poised for a recession, Steven Blitz, chief US economist at TS Lombard, noted that this slowdown has seen a deterioration in higher-paying jobs, which has led to higher growth low employment, in a note to the client on Friday.

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

While high-paying tech and financial companies have been in the headlines for layoffs, “In reality, tech companies only account for about 2% of total jobs,” she said. “Leisure and hospitality are booming,” she said, adding that another feature has been the growth of construction jobs, even as the housing market slumps.

“I think we’re doing ourselves a disservice not to look under the hood of the labor market,” Kelly said.

Who has a job matters

Fed Chairman Jerome Powell’s sharp focus recently on raising hourly wages near 5% comes as consumer inflation data has been softer, suggesting the worst inflation since the 1980s could to have passed.

Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, said that while inflation was the main issue for investors in 2022, how people are paid in the future and who gets hit by unemployment should be the main areas of focus over the months. forward.

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

Wilson-Elizondo at Goldman said she still expects the effects of the Fed’s higher interest rates to show more acutely in upcoming corporate earnings reports and potentially pockets of stress in credit markets to emerge as it drains more liquidity from the system.

“One of the hardest parts of depending on data from the Fed is that every point that comes out is going to lead to bigger swings in the markets if it’s not what’s expected,” she said.

Investors next week will be glued to the December consumer price index due on Thursday, with the annual total rate expected to fall to 6.6% from 7.1% in November, a retreat from its peak of over 9% in the summer . They will also hear from several US central bankers, including Chairman Powell on Tuesday speaking in Sweden.

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