Weekly Market Update: March 18, 2024

The nation added an estimated 275,000 jobs in February. The tally exceeded both the consensus expectation of 198,000 and the previous month’s figure of 229,000. At first blush the reading looked solid, but it did come with a few caveats. The estimated January tally was revised lower by 124,000, and the accompanying unemployment rate rose from 3.7% to 3.9%. The report also showed a decrease in the pace of average hourly wage growth, to 0.1%, a continuation of which may be needed to slow consumer spending enough to make a further dent in inflation.

Federal Reserve Chairman Jerome Powell said in recent testimony before Congress that the central bank is close to cutting the federal funds rate. However, Mr. Powell’s remarks came before the latest hotter-than-expected reading on consumer prices. Specifically, the Consumer Price Index (CPI) and the core CPI, which excludes the more-volatile food and energy components, both rose 0.4% on a month-to-month basis. On a 12-month basis, the CPI and core CPI increased 3.2% and 3.8%, respectively, both exceeding expectations.

The direction of near-term monetary policy may prove to be a balancing act for the central bank. The Federal Reserve wants to avoid cutting rates prematurely and risk seeing inflation reaccelerate. This scenario hurt the U.S. economy in the late 1970s. On the positive side, the continued resiliency of the labor market lowers the odds of a period of stagflation, where persistent high inflation occurs along with elevated unemployment and stagnant demand. Thus, we think the Fed will cut the benchmark short-term interest rate two to three times this year, with the first reduction possibly coming as early as the June Federal Open Market Committee (FOMC) meeting. The Fed must guard against keeping monetary policy too restrictive and risking creating stress in the economy. Signs point to some fatigue among consumers, as credit card delinquencies, which surged more than 50% in 2023, continue to rise.

Conclusion: Recent commentary from the Federal Reserve suggests that the lead bank will likely pivot on the monetary policy front around midyear. Given this backdrop and estimates calling for double-digit earnings growth for the S&P 500 companies in 2024, we still recommend an investment portfolio consisting mostly of high-quality stocks.

Source: ValueLine.com