A trader reacts to a screen displaying the Federal Reserve’s interest rate announcement on the floor of the New York Stock Exchange (NYSE) on January 31, 2024 in New York City, USA.
Brendan McDiarmid | Reuters
Cole Smead, CEO of Smead Capital Management, says strong employment numbers and continued wage growth suggest that the Federal Reserve’s interest rate hikes are having the desired effect. The US stock market is in a “very dangerous” situation.
Latest data released last week showed nonfarm payrolls rose by 353,000 in January, well above the Dow Jones estimate of 185,000, and average hourly wages rose 0.6% on a monthly basis. This was double the consensus estimate. The unemployment rate stabilized at a historically low 3.7%.
The numbers came after Fed Chair Jerome Powell said the Fed was unlikely to cut interest rates in March, as some market participants had expected.
Smeed, who has so far accurately predicted the resilience of U.S. consumers in the face of tight monetary policy, said Monday on CNBC’s “Squawk Box Europe” that despite $500, “it’s always been true. The risk is how strong the economy is.” Basis points for interest rate hikes. 1 basis point equals 0.01%.
“We know that the Fed raised rates, we know that caused a run last spring, and we know that it’s hurting the bond market. Really. The question becomes, “Do we know that the decline in CPI was actually caused by an increase in short-term interest rates?” “What tenure policy tool did they use?” Smeed said. .
“Wage growth continues to be very strong. The Fed has not affected wage growth and wage growth continues to outpace inflation as we speak. I see it as a very good situation that shows pressure.”
Inflation has slowed significantly from its pandemic-era peak of 9.1% in June 2022, but the U.S. consumer price index rose 0.3% month-on-month in December to an annualized rate of 3.4%, also in line with the consensus. That beat expectations and beat the Fed’s 2.5% rate. % the goal.
Smead said the decline in CPI should be chalked up to “good fortune” due to the contribution of falling energy prices and other factors outside the central bank’s control, rather than the Fed’s aggressive monetary tightening cycle. he claimed.
If the strength of the job market, consumer sentiment and household balance sheets remain resilient, the Fed may have to keep interest rates high for a longer period of time. This could ultimately mean that more and more listed companies will have to refinance at much higher levels than before, and the stock market may therefore be unable to benefit from a strong economy.
Smeed stressed that while the economy was “generally strong” between 1964 and 1981, the stock market did not benefit proportionately due to persistent inflationary pressures and monetary tightening. He suggested that we may be entering a period of
The average of the three major Wall Street stocks on Friday ended its winning week for the 13th time in the past 14 weeks, driven by huge profits from US tech giants despite Chairman Jerome Powell’s interest rate cut warnings. meta Increased optimism.
“The better question is why is the stock market at this price despite the strength of the economy, and is the Fed stuck in the mindset that it has to keep interest rates high? “That could be very dangerous for stocks,” Smeed warned.
“Following that, the economic gains that we see in the economy have very little to do with the stock market and do not benefit the stock market. What did the stock market do last year? Valuations It went up. Did it have a lot to do with the revenue growth that came with the economy? Not at all.”
The need for interest rate cuts has become ‘less urgent’
But some strategists say the recent upturn in indicators means the Fed’s efforts to orchestrate a “soft landing” for the economy are bearing fruit, and that a recession no longer appears to be in the cards. points out enthusiastically. The downside for the broader market.
Richard Flynn, managing director at Charles Schwab UK, said on Friday that until recently such strong employment figures would have “sounded alarm bells in the market”, but that no longer appeared to be the case. Stated.
“Lower interest rates would certainly be welcomed, but it is becoming increasingly clear that markets and the economy are coping well with the high interest rate environment, so investors are probably underestimating the need for monetary policy easing,” he said. “I don’t think it feels that urgent.” With notes.
”[Friday’s] This number may be another factor delaying the Fed’s first rate cut closer to the summer, but that may not be a bad thing if the economy maintains a comfortable trajectory. ”
Daniel Casali, chief investment strategist at Evelyn Partners, agreed, saying the bottom line is that investors are “starting to feel a little more comfortable that central banks can balance growth and inflation.” Stated.
“This benign macro environment is relatively constructive for stock prices,” he said in a note.
