The fortunes of Wall Street this year may lie less in the high-wage tech industry and more in the working class.
MarketWatch reported that as U.S. inflation retreated from a 40-year high, investors wondered whether it was time to buy those hard-hit stocks, but on Friday (6th) a strong December jobs report also showed wage growth. After slowing down, the bulls have another shot in the arm.
The Dow Jones Industrial Average jumped 700 points on Friday, while the S&P 500 and Nasdaq Composite snapped a four-week losing streak.
Although the US Federal Reserve (Fed) has raised interest rates rapidly since March, it must still try to cool the economy, but not too much, and strive to end the vicious cycle of high wages leading to high inflation. “Wages are still high,” said Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management.
Against this backdrop, she argues that the unemployment rate must rise for the Fed to return to its target inflation rate of 2% a year, so the US will enter a mild recession. “It’s too early to declare victory.”
The tech sector, a major source of stock market gains during the pandemic, is now home to the pain of layoffs.
Amazon (AMZN-US) recently confirmed that its total headcount is 18,000; Salesforce (CRM-US) announced that it will lay off about 10% of its staff, and other large technology companies also frequently reported layoffs, such as Intel (INTC-US), ), Hewlett-Packard (HPQ-US), Cisco (CSCO-US), etc.
But the bleak picture of layoffs in the tech industry is not the full picture of the labor market. The non-agricultural employment report showed that the United States added 223,000 new jobs in December, and the unemployment rate fell to the lowest level since 1969 at 3.5%.
Moreover, with hourly earnings rising only modestly, wages are expected to level off, potentially allowing the broader economy to stave off a recession.
Two caveats. First, like the Fed’s main measure of housing inflation, the central bank has traditionally focused on labor force statistics to aid monetary policy, and labor force statistics are retrospective data. Another point is that a decade of low interest rates and a flood of fiscal and monetary stimulus during the pandemic make this slowdown unusual.
Steven Blitz, chief U.S. economist at TS Lombard, noted that unlike previous periods when the economy looked like a recession was imminent, this slowdown appeared to see a deterioration in high-wage white-collar employment, leading to slower job growth.
There are a few reasons why investors might be paying attention to this, said Allie Kelly, chief marketing officer at Employ Inc, a massive provider of real-time hiring data. Tech companies only account for about 2% of total employment. Leisure and hospitality are booming. Also, oddly enough, construction jobs are growing despite the real estate market being depressed.”
Investors who don’t have a deep understanding of the job market risk reaping the consequences, she said.
Fed Chairman Jerome Powell has recently turned his attention to average hourly earnings growth of nearly 5 percent, as consumer inflation data have turned more benign, suggesting the worst of inflation may be behind us.
Stephen Dover, chief market strategist and head of the Franklin Templeton Institute, said that while inflation is the top concern for investors in 2022, the development of wages and who will be hit by unemployment should be the focus in the coming months. Areas of concern. “It affects how we invest and which companies are going to do well.”
Goldman Sachs’ Wilson-Elizondo expects the impact of the Fed’s rate hikes to be more acutely reflected in upcoming corporate earnings reports, and credit markets could be under pressure as rate hikes drain more liquidity from the economy.
“The difficulty for a data-dependent Fed is that every data point that is not expected leads to more volatility in the market.”
Investors this week will be closely watching Thursday’s December consumer price index (CPI), with analysts expecting headline annual growth to slow to 6.6 percent from 7.1 percent in November. The summer peak of this data is above 9%. In addition, some U.S. central bank officials will also speak, including Powell’s speech in Sweden on Tuesday.