The first trading week of the year got off to a rough start. For once COVID worries seemed to moderate somewhat and concerns about inflation and what it might mean for Fed policy moved front and center. The headline numbers for the equity indexes mask some real pain under the surface. For example, cloud computing stocks were hit with a -10.8% loss and Cathy Woods’ ARKK fund was down another -10.7% this week after falling -13.9% in the fourth quarter last year. As you can see below, over half of the stocks traded on the NASDAQ are now in bear market territory (-20% or more). Almost a quarter of all stocks are off 50% or more!!
There wasn’t any news on inflation this week (next week we get the monthly CPI report), but the monthly jobs number bolstered the inflation story in a roundabout way. The headline job number was soft – just 199,000 jobs were added last month, well short of expectations for 450,000. But the unemployment rate continued to surprise to the downside, falling from 4.2% in November to 3.9% last month. At this rate we’ll hit the February 2020 low in no time.
The weak jobs growth number was interpreted as a signal we have reached full employment and there simply aren’t enough workers out there for each job available. Analysts pointed to the fact that average hourly earnings increased a stronger-than-expected +0.6% last month, and 4.7% YoY as a sign of this. It is notable that earnings for nonsupervisory workers in leisure and hospitality notched a near +16% YoY gain.
Another clear sign that the labor market is very tight is to be found in the participation rate. This is calculated by taking total employed people plus total unemployed divided by the total population. While it has increased somewhat lately, we are still at levels last seen in the 1970s.
Why is this? There are a number of reasons such as lower immigration and more self-employed people. But another reason is the jump in people retiring. Over 1.5 million more people are retired than would have been expected before the pandemic. They probably aren’t going to re-enter the workforce anytime soon.
Implications for Policy
All of this is good news in the grand scheme of things. People are working and there are plenty of jobs for those who want one. Oh, yea, and wages are going up. So, what’s up with the market? How is good news bad?
It all comes down to what it means for Fed policy and how they perceive the inflation picture will evolve. This week we received the Fed’s minutes from the last meeting and it was very clear they are feeling the need to move against inflation. The key quote is below:
The market is now pricing in the first hike in March and there are high odds of four hikes this year.
The Fed is also likely to start shrinking the size of their balance sheet soon after they start hiking rates. Another quote from the minutes argued for this:
“Participants had an initial discussion about the appropriate conditions and timing for starting balance sheet runoff relative to raising the federal funds rate…they also discussed how this relative timing might differ from the previous experience, in which balance sheet runoff commenced almost two years after policy rate liftoff when the normalization of the federal funds rate was judged to be well under way. Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate. However, participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the Committee’s previous experience. They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization.”
In the last few months we’ve come a long way in terms of expectations for the Fed. Only a few short months ago consensus thought we might get one or two rate hikes in 2022 but quantitative easing would last all year. Now there are decent odds of four hikes plus balance sheet reduction. The sell-off in the speculative darlings of the last few years isn’t exactly shocking in this context.
Charts We Found Interesting
1. Experts are still looking at South Africa as a leading Omicron indicator for the rest of the world.
2. I don’t know what’s more surprising – that 20% of the Chicago police force is out sick, or that the average before COVID was 1,000 out of roughly 13,000 officers.
3. The perils of chasing past performance – ARKK investors are underwater on a dollar weighted basis.
4. As a Gen X’er, if I wasn’t so apathetic I’d be concerned that we might never see a Gen X president. Seems like a good bet we’ll skip straight to a Millennial – in 2024 or 2028.
5. I don’t know if I should laugh or cry, but maybe Rogan is the last chance for Gen X’ers?
6. A lot can change in the next few months, but the betting markets are predicting the Republicans take both the House and the Senate in November.
7. The Arab Spring was tied closely to food inflation. Is Kazakhstan a shot across the bow?
8. One more on the generation gap!
Have a good weekend.
Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.