Weekly Market Update: February 12, 2024

The nation created an estimated 353,000 jobs in January. That figure beat the impressive December tally of 333,000 and far exceeded the consensus forecast of 185,000. The unemployment rate held steady at 3.7%, another indication that the labor market remains tight. The report also showed that the average hourly wage rose 0.6% and 4.5% on a sequential and 12-month basis, respectively. Both figures topped forecasts and suggest that inflation in the labor market remains sticky.

The Federal Reserve held the federal funds rate at 5.25% - 5.50% at the January Federal Open Market Committee (FOMC) meeting. This was not unexpected, but in his post-meeting press conference Chairman Jerome Powell threw cold water on Wall Street’s notion that the Fed would implement six quarter-point interest-rate cuts in 2024, beginning at next month’s FOMC meeting.The more-hawkish monetary policy view is not surprising with inflation still running above the Fed’s target of 2.0% and given the strong labor statistics. Our stance remains that the Fed will not begin cutting interest rates until the second half of this year and there will be fewer reductions than Wall Street expects.

At the halfway point of earnings season for the fourth quarter of 2023, the results thus far have been encouraging. With roughly 50% of the S&P 500 companies having reported, the vast majority posted positive revenue and profit surprises. Although profit growth is only running at a low-single-digit pace, down from 8% in the third quarter, it would still mark the second-straight quarter of growth for the Index. Entering earnings season, Wall Street was forecasting a modest profit decline for the S&P 500 companies.

The better-than-expected results from Corporate America are welcome news. That is because with equity market valuations elevated entering earnings season, profit growth was likely needed to justify the higher price-to-earnings multiples. Our sense is that if corporate earnings were disappointing, equities would have sold off more on Chairman Powell’s unexpectedly hawkish monetary policy remarks.

Conclusion: With the recent encouraging economic data putting little pressure on the Federal Reserve to pivot on the monetary policy front and begin cutting rates, we still think a portfolio consisting of high-quality companies and cash-equivalent securities is a prudent investment strategy.

Source: ValueLine.com