CWS Market Review – February 6, 2024
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You Can Forget About That March Rate Cut
Well, maybe the Fed won’t be raising interest rates next month!
Over the last few days, we’ve gotten some important news that’s completely shifted our expectations for what the Fed’s plans are. It looks like the Federal Reserve probably will not be cutting interest rates at its March meeting. This new outlook is having a major impact on Wall Street. In two days, the yield on the three-year Treasury rose from 3.96% to 4.27%.
This change in outlook has impacted the stock market as well. On Friday, the S&P 500 closed at a new all-time high, but it was a very narrow market. By that, I mean that most of the heavy lifting was being done by a few stocks. Facebook, for example, gained more than 20%. Even though the S&P 500 rallied more than 1% on Friday, the average stock in the index was down for the day.
J.C. Parets noted that on Monday, we saw the fewest stocks on the NYSE above their 200-day moving average since early December, and the fewest above their 50-day moving average since mid-November.
The stock market finished just shy of a new all-time close today.
This is a confusing and temperamental market. Let’s breakdown what’s going on. We’ll start with last week’s jobs report.
Wall Street got a big shock on Friday when the January jobs report came in much better than expectations. Wall Street had been expecting a gain of 185,000 net new jobs. That wasn’t even close. Instead, the Labor Department said that the U.S. economy added 353,000 new jobs last month.
Who would have guessed that an aggressive interest rate policy from the Fed seems to have had little impact on the labor market? Not me.
Wall Street had been expecting the unemployment rate to rise to 3.8%. Instead, it stayed at 3.7%. If you work out all the decimals, then the current unemployment rate is lower than it was during every single month in the 1970s, 80s, 90s and 00s. All the way through 2018. (To be fair, the methodology hasn’t remained consistent over that time.)
We’re also seeing a pickup in wages. In January, average hourly earnings grew by 0.6%. That doubled Wall Street’s forecast. Over the last year, wages are up by 4.5%. The problem is that any previous wage growth had largely been eaten up by inflation. That’s not so much the case anymore.
Not only was January a good month for job growth, but the Labor Department also revised higher its numbers for November and December. The original estimate for December was for a jobs gain of 117,000. Now the Labor Department says it was 333,000. The number for November was revised upward by 9,000.
Here are some more details from the jobs report:
Job growth was widespread on the month, led by professional and business services with 74,000. Other significant contributors included health care (70,000), retail trade (45,000), government (36,000), social assistance (30,000) and manufacturing (23,000).
The broader U-6 rate increased to 7.2%. Also, the labor force participation rate stayed the same at 62.5%. If we look at the labor force participation rate for prime-working age folks (25 to 54), that rose to 83.3% which isn’t far from a 20-year high.
One interesting bit in the jobs report is that hours worked declined even though wage is holding up well. That may suggest that employers are opting to reduce hours instead of cutting jobs. It’s hard to say if this is a trend just yet, but it’s worth watching.
The jobs report came one day after the strong Q4 GDP report. That report said that the U.S. economy grew at a real annualized rate of 3.3% during the final three months of 2023. That’s quite good. The Atlanta Fed’s GDPNow model just raised its forecast for Q1 GDP growth from 3.0% to 4.2%.
With the economy growing and creating new jobs, why is the Fed in such a rush to raise interest rates? Well, it turns out that the Fed isn’t in a hurry to raise interest rates.
Fed Chairman Jerome Powell was interviewed on 60 Minutes. The interview aired on Sunday. In it, Powell said that although he’s pleased with the direction in inflation, he and the FOMC aren’t fully convinced that the battle is over.
PELLEY: You’ve avoided a recession. Why not cut the rates now?
POWELL: Well, we have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7% unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.
And, you know, we want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.
PELLEY: What is it you’re looking at?
POWELL: Basically, we want to see more good data. It’s not that the data aren’t good enough. It’s that there’s really six months of data. We just want to see more good data along those lines. It doesn’t need to be better than what we’ve seen, or even as good. It just needs to be good. And so, we do expect to see that. And that’s why almost every single person on the, on the Federal Open Market Committee believes that it will be appropriate for us to reduce interest rates this year.
I added the boldface. In short, Powell wants to see more good data, and the FOMC thinks rates need to be cut sometime this year.
In the trading pits, Wall Street traders think there’s only a 20% chance that the Fed will cut at its next meeting. That’s a big change in a short amount of time. Just one month ago, the odds of a March cut were at 64%.
The odds of a cut in May were at 95%. Now they’re at 67%.
We’re still in the thick of Q4 earnings season. Frankly, the results haven’t been that great. The first batch of earnings were weak, but the numbers have gotten a bit better.
According to the most recent numbers, 46% of the stocks in the S&P 500 have reported results. Of that, 72% have beaten on earnings and 65% have beaten on revenue. That’s actually not that good. (On Wall Street-istan, you’re expected to beat expectations.) The five-year average is a 77% beat rate for earnings and a 68% beat rate for revenue.
The old Wall Street formula is to lower the expectations bar so low that you can easily step over it. Then declare victory.
Earnings are tracking growth of 1.6%. The average report is 2.6% above estimates. That’s below the five-year average of 8.5%.
Follow-Up on the WillScot/McGrath Deal
Last week, I told you about WillScot Mobile Mini Holdings (WSC) and its offer to buy out McGrath RentCorp (MGRC).
I bring it up again because the behavior of both stocks has been unusual. Normally, the acquirer’s stock falls, but not this time. Shares of WSC have rallied. Meanwhile, McGrath has rallied well above its cash buyout price.
Here’s how it’s supposed to work. The deal is 60% cash and 40% stock. McGrath shareholders have a choice. For each share of MGRC they own, they can either get $123 in cash or 2.8211 shares of WillScot Mobile Mini, but MGRC closed today at $128.71 per share. That’s well above the cash offer price. Meanwhile, WSC closed today at $50.13 per share. That values MGRC at $141.42 per share which is 10% above the current share price, and 15% above the cash price.
Normally, the buyout target wants the cash portion of the deal so they’re protected from a sudden plunge in the acquirer’s stock. This time, it seems that the cash side of the deal is an anchor. I won’t be surprised if the details of this deal are refined in the coming weeks. WillScot will report its Q4 earnings on February 20, and McGrath reports the next day.
That’s all for now. I’ll have more for you in the next issue of CWS Market Review.
– Eddy
P.S. If you want more info on our ETF, you can check out the ETF’s website.
Posted by Eddy Elfenbein on February 6th, 2024 at 8:13 pm
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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