Up week – But More Jobs is Bad
Volatility Continues:
Equity markets had another very volatile week. Stocks rose sharply to start the week and 4th quarter but succumbed to a higher-than-expected jobs number, a still-hawkish Fed, and higher oil prices. It didn’t feel like it, but the S&P 500 added 1.5%%. The energy was the best group and Technology the worst.
OPEC didn’t help matters last week, agreeing to cut production by 2 million barrels per day. (Including Russian losses). These cuts lifted WTI oil prices back above $92 from the mid-$70 range just over a week ago. Energy stocks rallied sharply on the week
Federal Reserve speakers continued to take to the news channels in mass (some are now calling it the Federal Open Mouth Committee), and they remained super hawkish. Hopes of a Fed pivot, which we have not had, have evaporated. Any slowing of their speed would be welcomed news.
The good news in the jobs market late last week was bad for financial markets as payrolls rose 263k, slightly higher than expected, but well below the year-to-date average which is now 420k. The jobless rate fell to 3.5% as the participation rate dropped (bad for financial market sentiment). Wage growth slowed to 5.0% y/y, while job momentum peaked as there was a sharp pullback in job openings (JOLTS).
Third quarter earnings season starts next week and according to Goldman Sachs, consensus expects 3% year/year EPS growth, 13% sales growth, and 75 bp margin contraction to 11.8%. Excluding Energy (the only industry with positive stock returns year to date), earnings are expected to fall by 3% and margins to contract by 132 bp. It’s almost impossible for the overall equity markets to rise when rates are rising, and earnings decline year to year.
Points of investor interest will be:
(1) Headwinds due to a stronger US dollar,
(2) Margin compression from inflation and high inventories,
(3) Corporate tax changes effective in 2023.
- Year to date, the move down in risk assets and equities has closely followed real rates. Higher real rates have compressed PEs and valuations since late December 2021. Forward PE multiples have dropped sharply.
For the S&P 500, the forward multiple has compressed to about 15.5. It was almost in the 4th quarter of 2021. This PE compression has created a bear market in both stocks and bonds. When real rates sat in the 1%-to-2% range during most of the 2002-to-2008 period, the S&P 500 traded around 15-16x forward earnings.
Articles worth reading:
Stock Talk Podcast: ‘ Interest Rate Cycles ‘
News Or Noise: ‘ Higher Interest Rates “Pound” Financial markets ‘
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