Wentz Weekly Insights
Why Slower Wage Growth Was Perceived as Positive for the Markets

Markets started the shortened week off on a quiet note, with investors continuing to be cautious, but the second half of the week included additional comments from Fed officials and economic data that suggests the economy continues to slow while the labor market remains very strong. Manufacturing surveys and surveys of businesses in the services sector showed both saw declining business activity in December, something that was expected in manufacturing but not so much for the services sector. The ISM services index was 49.6 for December versus the expectation of 55.0 and November’s results of 56.5 (for these readings, anything below 50 represents contracting activity). While this would be considered as a negative for the economy, markets celebrated the news because in the each surveys, respondents reported decorating price pressures, with the price index in the manufacturing survey at 39.4 (falling) and in the services sector at 67.6 (while still very high, it fell from 70.0).
Then came the employment report on Friday morning. The Department of Labor said there were 223,000 new jobs in December, which was more than expected and was the ninth consecutive month of beating estimates, with wage growth of 0.3% in the month and 4.6% from a year earlier. As mentioned in our December 5th newsletter here, the Federal Reserve is expected to put more focus on wage inflation when assessing the inflation picture. The reason is because the influence wages have on services inflation. Inflation on goods was high in the first half of 2022, but as the economy returned to normal through the year, services inflation began to pick up and a sustained increase in inflationary pressures is the bigger concern.
Fed comments last week, including in public speeches by Fed district Presidents and the FOMC December meeting minutes, continue to show the Fed’s tough message on inflation and reiterate everything Powell has said in the December meeting’s press conference – rates will need to rise to at least 5% and stay there for all of 2023 and the cost of taking too little still outweighs the costs of doing too much (when it comes to policy and setting interest rates). The question the markets are having is, with slowing inflation confirmed by the data, can the Fed stick to its plan, or will it begin cutting rates by the end of the year due to a recession and inflation moving to its goal of 2%, or better yet can the Fed navigate the challenges without requiring a recession to bring down inflation. Until there is more certainty on this answer, markets, both fixed income and equity markets, should stay on the volatile path they are on.
In the meantime, fourth quarter earnings season will kick off later this week with the nation’s largest banks, JPMorgan, Citigroup, Bank of America, and Wells Fargo, all reporting quarterly results on Friday. Analysts are currently expecting fourth quarter earnings to have declined by 3% compared to the fourth quarter 2021, which comes after a decent 4.4% and 8.4% increase in the prior two quarters. If earnings finish the quarter as expected, it will mean an increase of 5.6% in earnings for the full year over 2021 earnings. This is sharply lower than the 14% increase that was expected at the beginning of 2022 and can mostly be attributed to higher costs companies have had to face, apparent with lower profit margins as revenues are expected to have stayed strong, rising 11.2% in the year.
We have seen expectations come down significantly over the past couple weeks and may see that continue this week with a couple large conferences where we could see earnings pre-announcements or guidance updates. This, along with many analysts downgrades, sets the bar lower and easier for companies to surpass, but in the end stocks are typically punished for reporting and forecasting lower earnings that the street expects.
Week in Review:
Stocks got off to a positive start to the year, following global markets which did not have the day off Monday. However, those gains were short lived as markets move lower, dragged down by big tech names like Apple and Tesla who are facing the concern of lower demand. The new year started how 2022 finished – value outperformed growth with value stocks up 0.48% while growth declined 1.21%. Sectors were mixed while the S&P 500 closed down 0.40%.
Stocks had a better day on Tuesday, after early morning weakness, but trading was choppy in the afternoon after the release of the FOMC most recent meeting minutes. The minutes were consistent with Powell’s press conference that the policymakers believe rates will continue to climb and hold just above 5% through 2023 with no rate cuts expected, focusing more on the tightness in the labor markets, and not loosening policy until it is convinced inflation is on its way back to 2%. Manufacturing PMIs for the world were mostly in contraction territory with price pressures easing for the most part, while job openings picked back up in November after approaching 10 million the months prior.
More Fed speak on staying tough on inflation and focusing more on the labor market, in addition to more data that job growth remains strong with very few new unemployment claims, had markets moving lower in Thursday’s session. Mega cap stocks continued to slide, most notably Microsoft over an analyst downgrade, and Tesla over its lower deliveries in 2022. Fed speak from Bullard, George, and Bostic repeated Powell’s post-FOMC message that the Fed needs to raise rates more and they will stay at a high level for longer. All U.S. indices were down at least 1% with the S&P 500 down 1.16%.
The labor report Friday morning was the big event for the week and showed another solid month of job gains in December with wages increasing at a slower pace than expected. Since the Fed is shifting more focus to wages, the lower wage growth was seen as welcoming with markets immediately moving higher and yields lower. However, additional Fed speak proves the jobs number does not change the Fed’s path or its outlook. In addition, the ISM services index showed weakness, with the prices index falling to 67.6 in the January survey, down from 70.0. The data in the morning gave a boost to stocks, with the S&P 500 finishing 2.28% higher, while shorter-term yield fell dramatically – the 2-year Treasury yield fell about 20 basis points during the session to 4.28% versus 3.57% for the 10-year Treasury yield.
For the week stocks finished in positive territory thanks to Friday’s rally. The major U.S. indices finished as follows: Russell 2000 +1.79%, Dow +1.46%, S&P 500 +1.45%, and NASDAQ +0.98%. The whole treasury yield curve moved lower with a large majority of the move coming Friday, but the shorter-end saw the largest decline as prices moved higher. It was quiet in the commodity space, although crude oil did fall 8.1% to about $74/barrel.

Recent Economic Data

  • Construction spending during November increased 0.2%, better than the 0.4% decline that was expected. The better than expected numbers were from a solid 0.9% increase in spending on nonresidential construction, which was offset by a 0.5% decline in residential construction as the housing market continues to cool. Compared to a year ago, total construction spending is up 8.5%, slowing from 9.7% in the prior month, with nonresidential spend up 11.8% and residential spend up 5.3%. We expect this to continue as the housing market returns to normal, before picking back up again over the longer-term due to the undersupply of homes.
  • The U.S. PMI manufacturing index was 46.2 for December, down from 47.7 in November (remember anything below 50 represents contracting activity, anything above 50 represents growing activity), stemming from weak demand that caused a drop in new orders and output and led to a smaller increase in employment, but helped the backlog of orders. The positive news is the trend continues with price pressures coming down to the slowest since July 2020.
  • The ISM manufacturing index was 48.4 for December, the lowest since 43.5 in May 2020, and contracting at a faster pace compared to the 49.0 reading in November. Very good news on the inflation front – the prices paid index at 39.4 was the lowest since April 2020, however this is on the goods side, the ISM “services” index still shows substantial price increases. Weaker demand led to a contraction in new orders at 45.2 while employment still grew at 51.4.
  • The ISM services index unexpectedly fell into contraction territory for the December survey with the index at 49.6, down from 56.5 in November and much lower than the 55.0 expected. There was a general slowdown in activity, with the business activity index down to 54.7, dropping 10 points, while new orders fell to 45.2 from 56.0. The employment index fell into contraction as well at 49.8, while prices paid decelerated at 67.6 versus 70.0 in November.
  • In 2022, just 13.7 million vehicles were sold for the worst year of sales since 2011. This represents an 8% decrease from 2021 and comes after sales eclipsed 17 million for five consecutive years prior to the pandemic. GM took back the title of being the top selling auto manufacturer in 2022, with 2.2 million vehicles sold, taking the title from Toyota in 2021.
  • The latest trade data shows the trade deficit fell substantially in November, down to $61.5 billion, a decline of $16.3 billion from October’s $77.8 billion deficit. Trade activity declined across the board – exports fell $5.1 billion to $251.9 billion while imports fell a much larger $21.5 billion, standing at $313.4 billion in the month. The drop was broad based with large declines in imports of cell phones (Apple?), pharmaceuticals, crude oil, and vehicles. Year-to-date exports are up 18.9% while imports are up 18.1% compared to the same period in 2021. While a reduction in the deficit is a good thing and will be a net positive to fourth quarter GDP, the drop in trade activity is just another sign of slowing activity around the world.
  • For the week ended December 31 there were 204,000 initial jobless claims, down 19k from the previous week and the lowest since September, with the four-week average at 225,000. Continuing claims were 1.694 million, down 24k from the prior week, with the four-week average relatively unchanged at 1.687 million.
  • As of the last business day of November, there were 10.458 million job openings, above the 10 million expected, bouncing higher after a couple months of declines. The number of job openings has not fallen below 10 million since mid-2021, and for comparison purposes averaged around 7 million prior to the pandemic. Separations were little changed, and within separations, the number of quits was 4.2 million, unchanged as well, with the quits rate at 2.7%, still high and indicating employees are comfortable and confident in finding a better/higher paying job.
  • ADP’s private payroll report shows private employers added 235,000 jobs in December, almost doubling expectations and more than the 182,000 jobs added in November. Most job gains were seen in small and medium sized businesses, with a decline of 151,000 in large sized businesses.
  • The establishment survey of the Department of Labor’s employment report showed there was growth of 223,000 payrolls in December, slightly ahead of the consensus expectation of 200,000, its ninth consecutive month of beating estimates, and consistent with the past couple months of gains. Job growth was widespread, highest in leisure and hospitality, health care, and construction, with only a notable decline in temporary help services again. The year saw payroll growth of 4.5 million, averaging 375,000 new jobs per month. Moving to the household survey, in more positive news, the labor force grew 439,000 people, moving the labor force participation rate to 62.3%, up from 62.1% in November. The number of people employed jumped 717,000 to 159.244 million, moving over pre-pandemic levels for just the second time of the recovery (last time was in September), while the number unemployed fell 278,000 to 5.722 million for the lowest levels since January 2020 which was tied the lowest level of unemployment since late 2000. This caused the unemployment rate to move lower to 3.5%, with the U-6, the underemployment rate, at 6.5%, down from 6.7%. One of the more important factors – wages – grew 0.3%, a slowdown from 0.6% in November, but that was revised down to 0.4% growth. Compared to a year ago wages are up 4.6%, a sharp slowdown from 5.1% in November (which was also revised lower, to a 4.8% increase). Markets moved higher, celebrating the lower wage growth, but the fact is the labor market is still very tight and the Fed will continue to tighten policy until it sees signs of slowing.

Company News

  • Roku said at the Consumer Electronic Show it will begin selling its own TVs that it designed and built on its own, giving it complete control of the TV production rather than relying on third parties like it does currently (it currently offers Roku-branded TVs through third parties). Roku currently makes a majority of its revenue from ad sales, and the news will give it access to another revenue stream.
  • Salesforce said it will restructure its business to reduce operating costs, improve margins, and continue its commitment to profitable growth which will result in it laying off about 10% of its workforce, citing the pandemic and hiring too many people as revenue accelerated over that period. The company said it would also exit real estate and cut office space in some of its markets. It said the restructuring will result in charges of approximately $1.4-$2.1 billion.
  • Nikkei reported Apple has told its suppliers to cut first quarter orders for its Apple Watch, AirPods, and MacBooks in response to weaker demand, citing a manager at an Apple supplier. Separately, it was reported Apple’s main iPhone producer, Foxconn, was near having 90% of its production capacity back on line for its new iPhone 14. Its production in China’s factories were significantly cut due to the Covid outbreak in the country.
  • Amazon said it would cut its staff by more than 18,000 employees, almost double the number expected when it initially announced its layoff plans in November, but additional economic uncertainty is causing it to lay off more people. A majority of the job cuts will be in its Amazon Stores and PXT segments.
  • Bed Bath & Beyond released preliminary financial results for its most recent quarter that was below consensus expectations due to lower customer traffic and reduced inventory availability. It added that due to recurring losses, negative cash flow, and liquidity projections, there is a substantial doubt about the company’s ability to continue as a going concern. It is considering strategic alternatives such as refinancing its debt, adjusting business activities, and selling assets.
  • Southwest said it will report a net loss for the fourth quarter driven by a negative impact of $725-$825 million due to the cancellation of about 16,700 flights over the holiday season. This compares to its most recent financial update December 16, when the company said it was expecting to be profitable. It said operating expenses are expected to rise due to the travel reimbursements to customers, premium pay/additional compensation for employees, but partially offset by lower fuel expenses.

Other News

  • Shortly after midnight Friday, Republicans finally, after the 15th round of voting over four days, elected Kevin McCarthy as Speaker of the House. Markets will be worried the inability of Congress to elect a Speaker, and the concessions/agreements made by McCarthy and Republican holdouts to secure enough votes to be elected Speaker, could lead to stalemates when it comes time to extend government funding and raising the debt ceiling, which will be the bigger issue sometime in the second half of the year.
  • The Hill reported President Biden is preparing to formally run for a second term, planning to make the announcement in the coming weeks.
  • The FOMC meeting minutes from the FOMC’s December meeting showed no policymaker thought it was appropriate to cut rates in 2023. Several said history warns against loosening policy too soon. Officials had a big emphasized that just because they slowed the pace of rate hikes does not change their stance on inflation. Economic activity in 2023 expected to be well below trend, but below trend activity is what is needed to bring inflation back to its goal. Persistently tight labor market keeps it on its path to 5.1% peak rates. It seems the Fed is now believing and telling the markets it cannot solve the inflation problem until it solves the labor force problem or until the jobs market is more in balance, which, according to the data above, is still not the case.
  • Recent Fed speak
  • Kashkari explained in a public essay released last week why he believes the Fed got it wrong on inflation, thinking it would be transitory when it became and more persistent issue due to “surge pricing inflation” and explaining why it is important to not get it wrong again right now and why doing more to get inflation down is better off than doing too little. He used these reasons to support why he thinks raising rates to above 5% and staying there through at least 2023 is the best policy path.
  • In an interview with CNBC, Kansas City Fed President Ester George reiterated Fed’s message of higher rates for longer with her projections now exceeding 5% and she sees it “staying there for some time” until she is confident inflation is coming down which acknowledging this could risk a recession due to a shock to the economy from higher rates when growth is already at below-trend.
  • St Louis Fed President Bullard said interest rates are “not yet in a zone that may be considered sufficiently restrictive” but the Fed will raise rates to those levels and will stay sufficiently restrictive through the year. Inflation expectations, a large part of the equation, have come down but the fact the labor market remains so tight will keep the Fed on its current path.

Did You Know…?

  • After a slow start, this year’s The Santa Claus Rally produced positive results, as history shows typically happens. The S&P 500 rose 0.80% over the period (the last five days of the year and the first two days of the new year), versus the historical average gain of 1.4%.
  • Following up on holiday shopping numbers, Adobe Analytics said its data shows consumers spent $211.7 billion online this holiday shopping season (November 1 – December 31), which was a 3.5% increase from the same period 2021. The five days between Thanksgiving and Cyber Monday contributed $35.3 billion of that total.

WFG News & Events

New Year Checklist:
The new year is a great time to review financial planning items such as the following:
  • Retirement plan contributions: Did you know 2023 IRS limits have been increased? In addition to tax brackets being updated, the IRS increase the amount individuals can add to retirement plans. If you are in a workplace retirement plan, the annual contribution limit was increased
  • 401k/403b/other qualified plans – Increased to $22,500 from $20,500
  • IRAs (including Roth IRAs) – Increased to $6,500 from $6,000
  • Simple IRAs – Increased to $15,500 from $14,000
  • Over the age of 50? Catch up contributions were increased as well. If over the age of 50 you can contribute an additional $7,500 to qualified plans (401k, etc), up from $6,000, an extra $3,500 to Simple IRAs, up from $3,000, however the catch up for IRAs is unchanged at $1,000.
  • Haven’t contributed to an IRA for 2022? Remember you have up until the time you file your taxes, or April 18, to make a 2022 IRA contribution.
  • Budget: Review 2022’s budget and see how your money has been spent to get a better idea of your spending patterns and create a 2023 budget. This could be an opportunity to find where you could save money to find more options for savings and/or investments. This could also be a chance to review debt to help prioritize working down those balances.
  • Review retirement accounts: Look at rebalancing accounts to match the desired asset allocation to your goals, objectives, and risk tolerance, as well as the current environment. Need help reviewing outside accounts or workplace retirement plans (401k’s)? Do not hesitate to reach out and ask for help!
Economic & Market Outlook Meeting
**Please note the change in the Outlook meeting schedule**
Wednesday, January 18 – 6:00 pm – WFG Auditorium in Hudson, OH
Thursday, January 26 – 12:00 pm – WFG Auditorium in Hudson, OH
Thursday, January 26 – 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 volatile 2022, 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 the challenging year ahead. We will have three seminar times, one during the lunch hour and the other two in the evening. 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

Reports pick up this week on both the economic and earnings calendars. Nothing notable is released on the economic calendar until the consumer price index report on Thursday morning. The consensus estimates see 0% growth in the index in the month of December and rising 6.6% from a year earlier (which would be a slowdown from 7.1% in November) with core prices up 5.7%. Also on Thursday is the latest on weekly unemployment claims. Then on Friday we will see import and export prices and the consumer sentiment index where markets will focus on inflation expectations, which actually fell in the latest month (December). There will be additional Fed speak this week, most notably Jerome Powell’s discussion on Central Bank Independence in Sweden. There is expected to be many forecast updates and earnings pre-announcements at several corporate conferences including the biggest conference of the year, the ICR Conference where many consumer companies attend, and the JPMorgan Healthcare Conference. Then the second half of the week fourth quarter earnings season unofficially kicks off with several of the big banks reporting including JPMorgan, Bank of America, Wells Fargo, and Citigroup on Friday morning. Most attention will be on the amount of cash banks set aside for bad loans, credit card delinquencies, and net interest income. Other earnings results will come from Bed Bath & Beyond (who just warned about its ability to survive), KB Homes on Thursday, and United Health and Delta Airlines on Friday. On the political side, President Biden will travel to Mexico Monday to meet with Canadian PM Justin Trudeau and Mexican President Andres Manuel Lopex Obrador to discuss migration and drug smuggling, and will travel to Japan on Friday for his summit with PM Kishida.