Wentz Weekly Insights
Powell Tempers March Rate Cut Expectations and Mega Cap Stocks Drive Markets Higher

Last week lived up to being the busy week we were expecting. There was high anticipation for the Treasury refunding announcement, the Fed’s FOMC meeting, the amount of economic data on the labor market, and the flood of quarterly earnings reports, and by time the week was over the S&P 500 gained another 1.38%. However, the narrow market we have talked about the past several months got more narrow. The gains were again driven by the largest companies in the world, while the average stock was relatively unchanged (the equally weighted S&P 500 up just 0.4%) and small caps underperformed with a 0.79% decline in the Russell 2000. In fact, as Goldman Sachs noted, it was the first time ever that the S&P 500 hit a new all-time high while the Russell 2000 was still in a beat market (down at least 20% from highs).
The Treasury Refunding turned out to be a non-event, with an announcement Monday from the Treasury that it expects to borrow $760 billion in the quarter, lower than what it expected 3 months earlier (means less Treasury supply which equals higher prices) due to higher cash on hand and and higher expected cash flow, triggering an equity rally Monday, then the refunding announcement Wednesday that it would issue more in shorter term securities as was expected.
Wednesday also saw the policy decision from the Federal Reserve after its FOMC meeting. The Fed left interest rates unchanged at 5.50%, and indicated it is not ready to cut rates now or at its next meeting in March. Remember, markets began the year putting an 80% probability the first rate cut would be seen in March. After the meeting that dropped to 20% and as of this writing Monday morning is at 15% (based on interest rate futures pricing tracked by the CME FedWatch Tool).
Fed Chairman Jerome Powell, who was also interviewed over the weekend on 60 Minutes and reiterated the message given after Wednesday’s meeting, repeatedly said the committee wants to be fully “confident” inflation is heading to its 2% target and the economy has surprised forecasters in many ways since the pandemic so the progress to its 2% target is not assured yet. While the past six months has seen significant progress on this, Powell mentioned they want to see more evidence so they are more confident. Regarding rate cuts, Powell said he does not think it is “likely the committee will reach a level of confidence by the March meeting” to determine it is time to cut rates and when the committee is ready to cut rates, it will move “carefully,” which we took as it will move slowly.
Markets were looking to get more certainty on the timing of rate cuts but did not get it this meeting. After the presser, stocks fell to the lows of the day while Treasury yields surprisingly fell.
The big event from an earnings perspective was results from the mega cap companies. Meta was the big winner by far – its stock rose 20% after earnings and gained a record $200 billion in market capitalization. It reported revenues and operating income well above estimates with current quarter guidance better than expected. Its family of apps (Facebook, Instagram, etc) have been a large beneficiary of AI, creating automation and more efficient targeting of its audience and higher engagement in its apps, generating more ad revenue. It also announced a big capital return plan, initiating its first ever dividend and adding $50 billion to its share buyback program.
Amazon was another winner – its stock rose over 7% after its earnings release. It reported better results than expected, with faster delivery times but driven most by growth in its cloud computing Amazon Web Service segment and generated higher profits than expected with solid guidance. Microsoft shares were unchanged with all segments performing better than expected and in line guidance with positive sentiment on its AI investments. Alphabet and Apple shares were lower, however. Alphabet was lower on slightly lower than expected ad sales, despite seeing better margins, while Apple was down over soft guidance and lingering concerns about demand in China.
But the most interesting part of the week was the employment data, mainly Friday’s Department of labor January employment report. The economy added 353,000 jobs in January, according to the report, double the consensus expectation and the largest increase in 12 months. Job gains were spread across most industries with upward revisions from the prior two months adding another 126,000 jobs.
However, the report reflects two surveys; one on establishments and one on businesses. The establishment survey shows the headline number we typically see in media – 353,000 jobs in January, which is a survey of businesses. The household survey includes self-employed, agricultural, and those that have multiple jobs. The household survey has shown overall job losses for 5 of the past 6 months, differing from the establishment survey that shows job growth accelerating over the same period. While there may be many reasons why, one may be the establishment survey is reflecting individuals that are taking on two jobs. This could be due to many reasons – in effort to keep up with inflation to maintain their lifestyle, because savings rates are at historical lows, and because they have spent through all the pandemic savings. Whatever the reason, we need more data to see a trend, but this could serve as a warning sign of a slowing labor market, one of the first signs of slowing economic activity.
Ultimately, if economic data remains this strong (consumer spending, job growth, productivity, etc), the Fed may see that rates do not need cut as aggressively as what markets are forecasting, but if data deteriorates, we would expect more rate cuts.
Week in Review:
Markets opened the week quiet on Monday morning but that changed in the afternoon when the Treasury announced it expects to borrow $760 billion in the first quarter, lower than Q4 and lower than what markets were expected. This triggered an afternoon rally with the S&P 500 closing 0.76% higher. It was more of a wait and see mode Tuesday with data that included job openings that unexpectedly rose in December and home prices that saw a small decline in November, which coincided with when mortgage rates hit the highs. After the market close, earnings reports came from AMD, Microsoft, and Alphabet that were mixed, but all three stocks were lower Wednesday.
Wednesday’s data included ADP’s employment report that showed slightly less payrolls added than expected in January and the fourth quarter 2023 employment cost index that was in line with expectations, slowing slightly from Q3. The Treasury Refunding Announcement gave no surprise, with Treasury deciding to issue shorter maturing securities over the next three months (due to higher rates; gives them the ability to issue new securities at lower rates in the future if rates fall). But the main event for the day was the Fed meeting where it had no changes in its policy, but commentary from Chairman Powell pushed back against the market’s expectations of a rate cut happening as soon as March. Markets ended up falling after these comments and closed at the lows of the day with the S&P 500 losing 1.61% while Treasury yields moved lower.
It was a slow start Thursday, but by time the session was over stocks essentially recouped all of Wednesday’s losses on no specific catalyst. Data included stronger worker productivity data. Stocks ended near the best levels of the day with the S&P 500 up 1.25%. After market close Thursday caught a lot of attention with earnings reports from Apple, Amazon and Meta. Meta was the big winner, with earnings surging as AI investments pay off, while Amazon was higher on stronger cloud spending (in its AWS segment), but Apple was lower as growth concerns in China continued.
Friday morning saw the labor report where job growth was almost double what was expected, with wage growth accelerating for the highest level in months. Treasury yields immediately rose, gaining back all of the week’s declines, over the thought the Fed will cut rates less, while stocks were mixed. The S&P 500 index was 1.07% higher driven by the top tech names while the average stock was down and the small cap Russell 2000 index down 0.59%.
It was a roller coaster of a week with stocks finishing mostly higher and Treasury yields falling but recovering Friday to end the week where they started. The dollar index rose 0.5%, gold saw its best week since December with a 1.8% gain, and oil continued its volatility, falling 7.3% for the week. Treasuries saw a busy week with the Treasury refunding announcement that was highly anticipated but turned out to be a non event – the 2-year was unchanged for the week at 4.37% after swinging 30 basis points while the 10-year yield fell 12 basis points to 4.02%, but up 21 bps from the weeks low. The major U.S. stock indices finished as follows: Dow 1.43%, S&P 500 +1.38%, NASDAQ +1.12%, and Russell 2000 -0.79%.

Recent Economic Data

  • The number of job openings the last day of 2023 rose to 9.026 million, up about 100k unexpectedly and back to the highest since September, but still down from the high of 12 million in March 2022, and still well above the pre-pandemic trend of about 7 million. The number of separations was little changed at 5.365 million, down about 40k from November, with the level of quits falling 132k to 3.392 million and layoffs rising 85k to 1.616 million (up from 1.475 million a year ago).
  • ADP data showed an increase of 107,000 payrolls in January, a little below consensus estimates and down about 50k from December’s hiring levels. Payroll gains were spread between all business sizes as well as industries.
  • The number of unemployment claims filed the week ended January 27 was 224,000, an increase of 9k from the prior week, with the four-week average at 207,750. The number of continuing claims was 1.898 million, a jump of 70k from the prior week, and the second highest since the pandemic recovery. The four-week average was 1.841 million, up just 7k.
  • Employment in the US increased by 353,000 in January, above economists’ consensus estimate of 170,000 and the largest monthly increase in 12 months. Even more, revisions for prior months was very strong – December was revised to 333,000 from 216,000 while November was revised to 182,000 from 173,000. It is worth noting, the data reflects revisions due to its annual benchmarking process due to updating seasonal factors. Most job gains were seen in professional services, health care, retail, and social, with declines in government and manufacturing. On the other hand, the household data showed the labor force increased 124k and the number of people employed increased 239,000, while the number unemployed declined 116,000. The unemployment rate remains at 3.7% while the underemployment rate (the U-6 rate) increased to 7.2% from 7.1%.
  • A bit of a surprise was the household data showed the average wage rose 0.6% in the month, double the expectation for the strongest growth in almost 2 years. For 2023, wages grew 4.5%, accelerating to the strongest 12-month increase since September (and up from the 12-month rate of 4.3% from December). However a negative was people worked less in January (possibly due to weather with a very cold stretch) as average work week fell slightly.
  • Overall, a very strong report – job growth was the strongest in a year and wage growth accelerated. This is a negative for those looking for rate cuts. A stronger jobs market and higher wage growth is more evidence the economy remains strong and inflationary pressures remain.
  • The employment cost index, a important data release on cost of employment that the Fed likes to use, rose 0.9% in the fourth quarter compared to the quarter prior, and increased 4.2% from a year earlier, slightly lower than the 4.3% annual increase from Q3. Wages and salaries increased 0.9% while benefits increased 0.7%. Wages and salaries are up 4.3% from a year ago (versus 4.6% in Q3) while benefits increased 3.8% over the same period (vs 4.1% increase in Q3). The employment cost index annual change peaked around 5.2% the beginning of 2022, and has only slowly moved lower and for comparison purposes pre-pandemic was trending about 2.5%-3.0%.
  • U.S. worker productivity (also known as output per hour) increased 3.2% in the fourth quarter (the change from the prior quarter and annualized), well above the estimate of 2.3% but a big slowdown from the third quarter’s very solid 4.9% increase (which was revised down from 5.2%). The 3.2% increase in productivity was due to a 3.7% increase in output and 0.4% increase in hours worked. For all of 2023, productivity was more muted, increasing just 1.2% (2.6% increase in output and 1.3% increase in hours worked). Meanwhile, unit labor costs increased 0.5%, much less than expected, reflecting a 3.7% increase in worker compensation and the 3.2% increase in productivity. Remember, productivity growth is one of the drivers of long-term economic growth.
  • The US PMI manufacturing index was 50.7 for January rising from 47.9 the prior month for the strongest improvement in manufacturing conditions since mid-2022 and the first time over 50 (the breakeven level – over 50 indicates growing conditions) since April 2023. Growth was supported by a bounce in new orders and a slower decline in output as production remained weak, while input prices reaccelerated as price increases hit a 9-month high.
  • The ISM manufacturing index was 49.1 for January, reflecting a smaller decline in manufacturing conditions compared to 47.4 from the month prior, however the index has been below 50, reflecting contracting conditions, for 15 consecutive months. New orders saw growth again, improving to 52.5 while production improved slightly. The prices index increased back into “increasing” territory as the report notes new 2024 pricing levels went into effect.
  • Construction spending continued its solid growth in December, rising another 0.9% in the month and doubling expectations. The amount spent on construction has consistently surprised to the upside for about a year now. Spending increased 1.4% on residential and increased 0.4% on nonresidential. Compared to a year ago total spending is up 13.9%, driven mostly by a 20.1% increase in nonresidential spending but also a 6.8% increase on residential as it bounces back after a soft first half of 2023.
  • The monthly Case Shiller home price index showed home prices in the U.S. fell 0.2% in November, the first monthly decline since January (however, rose 0.1% on a seasonally adjusted basis). The decline coincides with when mortgage rates peaked (end of October, beginning of November), so the expectation is price increases will pick up pace again. The index reported a 5.1% annual increase in home prices in November, up from 4.7% the prior month. Northeast and Midwest markets reported the largest price increases with the West seeing the smallest increase, but the spread between regions was the most narrow since the beginning of 2021.
  • The Consumer sentiment index for January showed consumers feelings about the economy was the best since mid-2021. The index rose to 79.0 with current conditions index dropping 1.5 points to 81.9 and expectations index increasing to 77.1 for the best since mid-2021 as asset prices rose to new highs. Inflation expectations did not change much from last month – one year inflation expectation were at 2.9% while longer term expectations were at 2.9%.

Company News

  • Walmart said its shares will undergo a 3-for-1 stock split. The company said the split was part of its “ongoing review of optimal trading and spread levels and its desire for its associates to feel that purchasing shares is easily within reach.” The split will occur after the close on February 23.
  • Elon Musk’s $55 billion pay package, which was a performance based stock option grant that was approved in 2018 by the Tesla Board, was rejected by a Delaware judge who said the pay was unduly approved. This comes after a Tesla shareholder filed a lawsuit saying the pay package was excessive. The pay package started at $0 and was only increased if Tesla stock reached certain milestones up to $650 billion, which the stock did achieve. According to Bloomberg, without the stock options, Musk’s net worth would drop to about $154 billion, making him the third wealthiest person in the world.
  • Another round of tech layoffs were announced last week, including from companies like PayPal, Block, Okta, Zoom, and Snap, as well as UPS and the Wall Street Journal. According to layoffs.fyi, the total tech layoffs year-to-date are at about 32,000 from over 120 tech companies.
  • Byron Allen, media mogul known for founding Entertainment Studios, made a $14.3 billion offer to acquire Paramount Global, parent company of CBS and Viacom. The offer represented about a 50% premium to where shares were trading prior to the announcement. Later, a report from the NY Post said Paramount’s board has formed an independent committee to explore strategic alternatives.
  • A report by the WSJ said Intel is delaying the construction for its $20 billion chip manufacturing plant outside Columbus, OH. The report said the delay was due to “business conditions, market dynamics and being responsible stewards of capital.” It initially planned to start construction next year but now will not be until 2026.
  • Disney will be taking a similar step as Netflix and will begin enforcing password sharing for Hulu, Disney+, and ESPN+. CEO Bob Iger recently said on the last earnings call that the company was looking to improve its streaming business by implementing stronger standards on password sharing, but that is not expected to have a meaningful impact to financials until 2025.

Other News

  • China’s stock market, measures by the CSI 300 index, an index of 300 stocks on the Shanghai and Shenzhen Stock Exchanges, extended its losses last week and fell to a new 5 year low. China has been exploring different ways to provide a boost for its economy and markets, announcing rate cuts and early last week implementing curbs on short selling stocks (a bet that stocks will go down). Not helping last week was data on its manufacturing industry that showed the fourth consecutive month of contracting activity. Chinese officials have reportedly remained busy looking for ways to boost confidence and investor sentiment.
  • The House passed a $78 billion tax bill last week that includes business and child tax breaks. House Speaker Johnson took the vote to the floor despite opposition from a group of Republicans. According to Bloomberg, the bill includes child tax credits which would be paid for by the ending of employee retention tax credit to employers from the pandemic, but Republicans say that credit was not paid for in the first place so it shouldn’t be used as an excuse to pay for the child tax credits. For businesses, the bill would bring back tax breaks allowing business to recoup the costs of interest expense, and R&D, which would benefit companies with large capital/research expenses. Also, the Senate introduced a separate $118 billion bill on border security that includes additional aid to Ukraine and Israel. Republican House Speaker Johnson had already said the bill would be dead on arrival in the House and that it was “worse than we expected.” According to Reuters, the bill includes $20.2 billion on border security, $60 billion to support Ukraine, $14 billion to support Israel, $2.4 billion for the conflict in the Red Sea, and $4.8 billion for Indo-Pacific allies facing aggression from China.
  • Stock and bond markets saw a rally to start the week after the Treasury announced borrowing estimates for the first quarter of the year. The Treasury said it expects to borrow $760 billion from January through March, down from its previous projection of $816 billion, sending bond prices higher as lower borrowing equates to lower supply of new Treasuries. Markets were expecting something higher due to rising budget deficits. The Treasury said the lower borrowing was because of higher net fiscal cash flows and having more cash on hand when the quarter began than expected.
  • The Bank of England held its rates and policy unchanged in a 6-3 vote where 2 voted for another rate hike and 1 voting for a cut. It said it expects inflation to decelerate to the 2% target temporarily in Q2 but increase again in Q3 and Q4. It removed the statement that more rate hikes may be needed.

Did You Know…?

Meta’s Record Day

On Friday, Facebook’s parent company Meta recorded the largest one day gain of any company in history. The market cap of Meta increased roughly $205 billion on Friday, or 20%, to about $1.220 trillion. The previous record was when Amazon gained $191 billion in market cap on a February day two years ago. The gain was driven by its quarterly earnings, its forecasts, and its new capital allocation plans. It easily beat analysts’ estimates for revenues and earnings in the fourth quarter, provided a forecast that was better than expected, and said it will add another $50 billion to its share repurchase program and initiate a $0.50 quarterly dividend for the first time ever.

WFG News

Economic & Market Outlook Meeting

Thursday, February 8 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, February 8 – 6:00 pm – WFG Auditorium in Hudson, OH
Wentz Financial Group will be holding its semi-annual Economic and Market Outlook Seminars on the dates above. Join us as we recap a surprisingly positive 2023, explain how we got to where we are today, as well as give our expectation and forecast on the economic and market environment and how that will affect portfolios in another challenging year ahead. Please RSVP by responding to this email or by calling the office at 330-650-2700. Seat are limited for each event and will be on a first come first served basis. A buffet style meal will be served approximately 30 minutes before each event.

The Week Ahead

We are almost halfway through earnings seasons, and this week another wave of quarterly earnings reports will be the biggest highlight, with about 20% of the S&P 500 components reporting this week but more reports from smaller companies. Notable quarterly earnings will come from Caterpillar, McDonald’s, Tyson Foods on Monday, Chipotle, Toyota, Ford, Spotify, BP, on Tuesday, CVS, Fox, PayPal, Uber, Disney, Alibaba on Wednesday, Expedia, Pinterest, Kenvue on Thursday, and PepsiCo on Friday. The economic calendar is very light on data releases, with only the ISM services index on Monday, trade data on Wednesday, and jobless claims on Thursday. After last week’s Fed meeting, policymakers will be active this week in public appearances and we expect to hear many comments on policy throughout the week from many district Presidents.