- The January employment report surprised markets with job gains more than twice the level Wall Street was expecting. 517,000 jobs were added in January, more than double the expectations of 190,000, and December’s figure was revised higher to 260,000 from the initial 223,000.
- The S&P 500 was up +1.6% for the week, but that was off from higher levels after falling on Friday following the unexpectedly strong jobs report. The small cap Russell 2000 pushed +3.9% higher for the week and the tech-heavy Nasdaq Composite climbed 3.3%.
- Treasury yields and the U.S. dollar were noticeably higher following Friday’s jobs report, as the yield on the 2-year note climbed +20 bps to end the week up +9 bps at 4.29% and the yield on the 10-year note rose +13 bps to end the week up +2 bps at 3.52%.
Stronger-than-expected jobs report surprises markets
Stocks and bonds were sitting on gains for the week going into Friday’s session but a stronger-than-expected employment report and several lackluster earnings reports from well-known companies had markets end the week on a down note. The increase in January nonfarm payrolls was far higher than expectations and the unemployment rate unexpectedly declined, underlining just how resilient the labor has been despite increasing signs that the economy is slowing and a wave of companies announcing workforce reductions in recent months. Still, most major stock indices had solid gains for the week. The S&P 500 was up +1.6% for the week, the small cap Russell 2000 pushed +3.9% higher, and the tech-heavy Nasdaq Composite climbed 3.3%. Non-U.S. stocks were hindered by a stronger U.S. dollar, which was up +1.0% on the week, and ended mixed with developed markets (MSCI EAFE Index) up 0.5%, while the MSCI Emerging Markets fell -1.2%.
On Wednesday afternoon the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting, raising the target for the federal funds rate by 25 basis points (bps) to a range of 4.50% to 4.75% and Fed Chair Jerome Powell said more increases in interest rates will likely be needed to continue lower inflation. This hike continues the deceleration in the Fed’s rate hike campaign after four-consecutive 75-bp rate hikes and a 50-bp increase in December. In its statement, the Committee noted that recent indicators have shown modest growth, job gains remain robust, and the unemployment rate continues to be low. The Committee said that future rate increases will be appropriate. However, investors reacted as if the Fed’s comments were a bluff. Markets rallied hard after Powell’s press conference, seeming to believe instead that the Fed will eventually end up cutting rates later this year. But Friday’s surprisingly strong jobs report threw cold water on that prospect and investors curbed their enthusiasm. Treasury yields and the U.S. dollar were noticeably higher following Friday’s jobs report, as the yield on the 2-year note climbed +20 bps to end the week up +9 bps at 4.29% and the yield on the 10-year note rose +13 bps to end the week up +2 bps at 3.52%. As a result, the Bloomberg U.S. Aggregate Bond Index eked up +0.03% for the week, and Non-U.S. bonds inched up +0.27% for the week.
Though the Fed and the employment report garnered heavy focus, there was also notable corporate profits action as the Q4 earnings season neared the midpoint with 251 of the S&P 500 companies having reported results. Perhaps the biggest takeaway is that both earnings and revenue beat rates (relative to Wall Street estimates) continue to fall, and according to Bespoke Investment Group, the Q4 earnings results thus far are in the bottom 40% of earnings seasons since 2001. FactSet is reporting a year-over-year earnings decline of -5.3%, which would be the first negative quarter since Q3 2020 and the first negative annual earnings since Q3-2020. And reflecting the concerns over an economic slowdown, Wall Street analysts have lowered earnings estimates for Q1-2023 more than normal, decreasing -3.3% from December 31 to January 31.
Chart of the Week
January Nonfarm Payrolls soared by 517,000 jobs month-over-month, more than double expectations of 190,000. And December’s figure was upwardly revised to an increase of 260,000 from the initial 223,000. The surprisingly strong job additions are somewhat confounding given the many announcements of workforce reductions in recent months, but according to this report, the overall labor market remains as strong as ever. The Unemployment Rate confirms the healthy jobs picture, falling to 3.4%, above expectations for a rise to 3.6% and December’s 3.5%. January’s payroll gains were the largest since July 2022 and the unemployment rate is the lowest in 53 years. Normally, such strong jobs growth would push wages up, but Average Hourly Earnings were up only +0.3% for the month, matching expectations and December’s level. Year-over-year wages were +4.4% higher, slightly above forecasts of +4.3%, but lower than December’s upwardly revised +4.8% rise. A month ago, the data suggested hourly wages had grown an annualized +4.1% in the three months through December, a significant slowing from earlier in the year. That’s now been revised up substantially to +5%, slowing only to +4.6% in January. Finally, Average Weekly Hours worked rose to 34.7 from December’s 34.3 rate where it was expected to remain. The average workweek for private-sector employees jumped in January, an indication that demand for labor remains strong. Hours had been trending lower since early 2021 and hit a post-pandemic low in December, a development that suggested employers were holding onto workers even though there was less for them to do. Economists typically caution against reading too much into a single month’s numbers, but this report was unabashedly strong and may mean the Federal Reserve’s job is not done yet.
No Slowing in the Labor Market
Nonfarm payrolls, monthly change
* 2019 average. Note: Seasonally adjusted.
Source: Labor Department, The Wall Street Journal.
- The January Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) moved further into contraction territory (a reading below 50), falling to 47.4—the lowest reading since May 2020—from the prior month’s unrevised 48.4 reading, and below expectations for a dip to 48.0. The manufacturing sector contracted for a third-straight month as new orders continued to contract, along with production, while employment held onto expansion territory. Inventories declined but continued to grow, and supplier delivery times increased but continued to contract. Inflation pressures continued to decrease but at a slower pace.
- The ISM Services PMI moved back into expansion territory in January (a reading above 50), rising to 55.2 from 49.2 in December, well above expectations for an increase to 50.4. The latest figure for the key services sector is now well off its lowest level since May 2020, as business activity and new orders rose solidly, employment inched higher and out of contraction territory, while prices paid declined to 67.8 from last month’s 68.1, a level not seen since January 2021.
- The final January S&P Global U.S. Manufacturing PMI remained in contraction territory (a reading below 50) but revised higher to 46.8 from the preliminary reading of 46.6 where it was expected to remain.
- The S&P Global U.S. Manufacturing PMI for January was revised higher but also remained in contraction territory (a reading below 50). The index was adjusted to 46.9 from the preliminary read of 46.8, where it was expected to remain, and above December’s 46.2.
- December Factory orders increased +1.8% for the month, below expectations for a +2.3% gain but well ahead of the prior month’s negatively revised -1.9% decline. Durable goods orders—preliminarily reported last week—were unadjusted at the previously reported 5.6% monthly increase, matching expectations.
- The ADP Employment Change Report showed private sector payrolls rose by 106,000 jobs in January, below expectations for a 180,000 gain, but the prior month was revised higher to 253,000. The report, which came a day ahead of the January nonfarm payrolls release, diverged noticeably from those much stronger-than-expected results.
- The December Job Openings and Labor Turnover Survey (JOLTS), a measure of unmet demand for labor, unexpectedly increased to 11.01 million jobs available to be filled, above expectations of 10.30 million, and November’s downwardly revised 10.44 million. The report showed the hiring rate was 4.0%, up from November’s 3.9% level, and total separations—including quits, layoffs, discharges, and other separations—remained at November’s 3.8% rate. The quit rate for December also maintained the prior month’s 2.7% pace.
- The Conference Board’s Consumer Confidence Index fell to 107.1 in January from December’s upwardly revised 109.0 level, where it was expected to remain. The Present Situation component of the survey increased, while the Expectation component moved lower. According to the report, “the Expectations Index is below 80, which often signals a recession within the next year.” On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—increased to 36.9 from the 34.5 level posted in December.
- Construction spending unexpectedly fell 0.4% m/m in December, versus projections of a flat reading, and compared to November’s upwardly revised 0.5% rise. Residential spending went down 0.3% m/m, and non-residential spending decreased 0.5% m/m.
- The 20-city composite S&P CoreLogic Case-Shiller Home Price Index for November showed a +6.8% year-over-year gain in home prices, in line with the estimate, but below the prior month’s positively revised +8.7% increase. Home prices were down -0.5% month-over-month on a seasonally adjusted basis, matching the prior month’s unrevised decrease and less than expectations for a 0.6% decline.
- The Q4 Employment Cost Index (ECI) increased +1.0% quarter-over-quarter, below the expected +1.1% gain, and down slightly from Q3’s unadjusted +1.2% rise.
- The January Chicago PMI fell more than expected and remained in contraction territory (a reading below 50). The index declined to 44.3 from December’s 45.1 reading, below expectations for a slight downtick to 45.0.
- The January Dallas Fed Manufacturing Index improved more than expected but remained in contraction territory (a reading below zero). The index rose to -8.4 from December’s negatively revised -20.0, better than expectations for an increase to -15.0. Production and capacity utilization both jumped, while new orders improved but remained in negative territory. Employment growth accelerated but prices paid for raw materials increased and prices received for finished goods decelerated slightly.
- The weekly MBA Mortgage Application Index fell -9.0% from the prior week’s +7.0% gain, snapping a string of three-straight weekly gains as the Refinance Index dropped -7.1% and the Purchase Index fell -10.3%. The drop came as the average 30-year mortgage rate slipped 1 basis point to 6.19%, which is up 2.41 percentage points versus a year ago.
- Weekly Initial Jobless Claims fell by -3,000 to 183,000 for the week ended January 28, below expectations for 195,000 and the prior week’s unrevised 186,000. Continuing Claims for the week ended January 21 fell by -11,000 to 1,655,000, below expectations of 1,684,000.
The Week Ahead
Next week’s economic calendar is quite sparse so most of the focus will likely fixate on earnings reports and Fed speakers, including Chair Jerome Powell, who is scheduled to make remarks Tuesday at the Economic Club of Washington, D.C. Wednesday will be heavy with Fed speak, as New York Fed President John Williams will participate in a live interview with the Wall Street Journal, Fed Governors Lisa Cook and Chris Waller both have speaking engagements, and Minneapolis Fed President Neel Kashkari will be at the Boston Economic Club.
Did You Know?
HOLD THE PHONE – Economic uncertainty, supply chain issues and a lack of “must-have” features resulted in a sharp slowdown in the mobile phone industry to close out 2022. During Q4 2022, global shipments of smartphones dropped -18.3% relative to Q4 2021 for the largest quarterly decline on record. For the entire year, total shipments dropped -11.3%, the largest annual decline since 2013 (SOURCE: IDC, MFS).
LATE FEES – The limit on credit-card late fees could fall to $8 as the result of a rule proposed by the Consumer Financial Protection Bureau (CFPB). Penalties can currently be as much as $41 for a missed payment, and typically far exceed the card issuers’ costs to collect them, according to the CFPB (source: The Wall Street Journal).
SHORTS COVERING – The most heavily shorted stocks are crushing the market so far in 2023. Through January 25, 2023, the 10% of stocks in the large-cap Russell 1,000 Index with the highest short interest as a percentage of the float were up an average of +16.4% in 2023. The 10% of stocks that are the least shorted were only up an average of +2.9% in 2023 (source: Bespoke Investment Group).
This Week in History
SILVER ANNIVERSARY – On February 2, 1998, less than three years after breaking the 500 price level, the S&P 500 closed above 1,000 for the first time ever, finishing the day at 1,001.7. 25 years later, the S&P 500 is at 4,136.48 (as of 2/3/2023) and produced a total return of 556.6%, or 7.8% annualized (source: The Wall Street Journal, Bloomberg).
Asset Class Performance
The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.
Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by: 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.