In the month of February, the S&P 500 finished down -3.62%, and the Dow Jones Industrial Average down -4.21%. The S&P 500 is now up just 3.4% for the year through the month-end.
It’s no surprise that inflation remains the headline du jour and is still the biggest driver of market action. While there is still reason for our cautious optimism (strong consumer spending, healthy corporate balance sheets, and demand), the fight to tamp down inflation meaningfully is anything but over.
While the consumer still has record savings and yet also maintained record spending levels, as you might expect, those savings continue to dwindle in the face of things like the price of eggs seemingly needing a loan application to be purchased and mounting consumer debt levels should not be ignored (and we are not). February’s economic data was a stark reminder that these significant cross-currents have not meaningfully improved in an otherwise robust economy.
In February, we received an update on the jobs market, and with that update, we saw blowout numbers in January payrolls. The headline number was stunning, with 517,000 jobs added in the month of January, 200,000 more than expected. Unemployment fell to a 53-year low of 3.4%.
What was not captured in these headlines were anomalies in the data, like 74,000 jobs being “added” simply because a strike ended with the University of California academics and a warmer January across the country. Nonetheless, it must be said, indeed, these were surprisingly strong numbers, so the market’s reaction was not positive.
The irony of this moment is that good news for jobs is bad news for inflation. So, when news about people losing jobs is good, how much is there to cheer about? And what we’ve seen is layoffs are accelerating, so you decide how you feel about that. Unfortunately, this shotgun blast approach to performing heart surgery (managing inflation) highlights the limits of the toolkit called monetary policy, which is pretty much all we’ve provided to our Federal Reserve.
Elsewhere, we continue to see commodity and product prices moderate or decline, which is a welcomed trend and should provide some ease to inflation data, along with rents continuing to decline. With the push and pull of jobs vs. wages and supply vs. demand, the market volatility is being sewn with the needle of our economy slowing down enough, but hopefully not too much.
Over the next two weeks, we’re going to be barraged with important economic updates capturing February’s data, including Jobless Claims, Payrolls, PPI (producer prices measuring inflation), NY Manufacturing, Capacity Utilization, and Consumer Expectations. So, it would not be surprising to see elevated volatility in the near term, culminating with the next Fed interest rate decision meeting on March 22.
State Of The Markets & World
On a technical level, the broad US market would need to pull back by about 2.25% from yesterday’s close before it becomes technically weak on a 200-day moving average. As we’ve written about many times, this is a widely followed indicator. Last week the 200-day level was tested and held, and the market bounced back quite nicely.
Elsewhere in the world, China’s “errant weather research balloons” aside, the most concerning development expressed by the US is the rumor China is considering supplying weapons to Russia in Ukraine. If this change does pass, it will most certainly accelerate global tensions.
China’s arms deal would significantly change the landscape, creating a proxy war between China and the US on Ukraine’s battlefields, allowing both to see how their military hardware does against each other. While we do not view the probability as high, the chance is also not zero. This change would radically shift our view of the global outlook, which we still believe warrants cautious optimism despite this last month of market action.
As always, we monitor portfolios and the world around us; as the facts change, so will our opinions.