Dazed And Confused

Weekly Newsletter: February 10, 2025

“Can’t you see this is the land of confusion?” Originally written during the Reagan administration, it may indeed pertain to today. Geopolitical events seem to change daily, creating confusion for financial markets about the long-term direction of the economy. The employment report, usually a bastion of some certainty, got upended as revisions to the prior years, fomenting doubt about all the supposedly created jobs. Revisions are a fact of economic life, however many decisions on Wall Street get made at the moment following various economic releases. This one could get revised dramatically as not all the California fire-related lost jobs have been captured in this report. For what it is worth, Wall Street expects that whatever happens to the numbers will forever alter the direction of the economy. Once the data is out and investors react, like any two-year-old, they are looking at the next shiny thing, which is the inflation data due this week. There will be an opportunity for the inflation data to look decent on an annualized basis over the next few months. The monthly read for the first four months of 2024 was between 0.3 and 0.4%, meaning anything a smidge lower will drop the annual inflation rate. To get closer to the 2% annual rate the Fed wants to see, more 0.1 and 0.2% figures will need to be recorded. Confused?

Once all the analysts' spreadsheets get redone with the new/updated figures on employment there are a few things that stick out. First is the huge amount of revisions lower to the number of new jobs created. Taken as a whole, these types of negative revisions usually occur at or during recessions. The economy is not in a recession today. Second, even with the revisions lower, new jobs are growing at roughly 1.4% annually. This is a lower than “average” number during an economic expansion, but it is also very likely skewed by Covid-related figures over the past four years. Finally, wage growth was significantly higher, still over 4% annually. This compares favorably to the inflation rate of (pick a number) 2.75 to 3.25%. This should also “allow” the consumer to continue to spend as they have done over the past few months. The next shoe to drop will be the inflation data. Based solely on commodity prices in general over the past few months, the risk is a higher-than-expected print. Be sure that once the release is made, the markets will react wildly and extrapolate the one data point to infinity and beyond.

The various bond models have not flipped to positive, meaning a decline in rates is at hand. However, some of the long-term data points indicate that yields today are “fair” given the current economic backdrop. If inflation does tick higher, that would mean a commensurate increase in interest rates. That said, interest rates are finally paying a decent yield above inflation. One worry that does exist in the markets is the still very small differences in yields between high-yield (junk) bonds and treasuries. They remain near historic lows and it argues for a conservative approach to bonds.

On top of the economic data, corporate earnings continued to flow last (and next) week. The highlights were the large tech names that generally disappointed. Much of the shortfall was due to their “cloud computing” (servers to store, manage, and process data – think AI). Making things a bit worse was the increase in their spending on additional storage and processing. As a result, the stocks fell as the rest of the markets held up. Equal weighted and small stocks bested the “Mag 7” and have been doing so since Christmas. Could this finally be the comeuppance that many have been waiting for in technology? Time will tell, but the valuation differences between the largest stocks and the rest of the market would argue that there are good companies to be bought at decent prices.

Inflation data due this week will be the primary focus for investors. Volatility around geopolitical “events” will mean more bouncing around for the market in general.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.