Well, the labor report was everything one could have hoped for this morning, BUT there is also a war in Europe. US jobs jumped by 678,000 last month. We even got a boost in labor force participation (62.3%) in concert with a drop in the official unemployment rate (3.8%)—meaning the unemployment rate is declining for the right reason. Of equal importance is the wage picture. Hourly earnings actually flatlined MoM in February, which is a welcome sign for those of us tracking the inflationary backdrop. Ordinarily, a report of this nature would capture the hearts and minds of investors; however, Russia’s move to fire upon and seize the largest nuclear power plant in Europe thoroughly eclipses anything the Bureau of Labor Statistics can offer.
To put it politely, there is A LOT of noise in the world today. However, the underpinnings of the global economic recovery remain intact. Of course, with a land war in Europe currently underway things can turn on a dime, but the data suggest we are still heading in the direction of a full pre-pandemic recovery. In fact, as we have noted over the past several months and quarters, many sectors of the domestic and global economy have already reached or eclipsed activity levels last seen in late 2019 AND corporate America has never been more profitable.
The inflationary backdrop is not great and Russian aggression only adds fuel to the fire. However, Covid-19 restrictions are moderating and the world is one giant step closer to “normal” in that sense. A world in which people can return to the workplace free of fear is undoubtedly a good sign and should put some downward pressure on inflation in the near-term. Long-term inflation expectations remain relatively anchored to a world in which the dual impacts of technology and an aging populace keep prices in check. This is supportive of our expectations that this Fed hiking cycle is likely to be relatively shallow with a terminal rate lower than what was achieved in Powell’s last at bat in 2018. On the employment front job openings remain at or near the highest on record, signaling demand for workers in our domestic economy is perhaps at the strongest level in American history. Certainly, there were some missteps along the way from a policy standpoint (monetary, fiscal, foreign, etc...), and to a certain extent, we are reaping what was sown during those challenging months before and after vaccines were released. However, we are on solid ground with respect to the US economy in the present and that is something not to be overlooked.
Beyond our shores geopolitical shadows of the past loom large. These are tense times, and we cannot fully rule out a military miscalculation or policy error. Thus, we are reducing our near-term present value estimate for the S&P 500 to 4600 to account for a new and rapidly evolving dimension of risk. The fundamental backdrop is still supportive of our longer-term strategic allocation to large cap US equities; however, the multiple that investors will be willing to pay in a world fraught with layer upon layer of risk will likely have to compress a bit. So, we are recalibrating our yearend expectations to 5000, while pushing our 5350 price objective for SPX out into 2023.
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- February 2022)