October 3rd’s new jobs report contained both good and bad news for financial markets. Meanwhile we are 10 months into a cyclical “Bear Market” which on average lasts one year.
- Labor markets are cooling and likely to weaken further. 263,000 new jobs is positive but well below the average of the last six or three months of 2022. Average hourly earnings are up 4.4% on an annualized basis which is good news for the Fed and for employers.
- With job vacancies down 10% over the last month but no sign worker shortages will be resolved by an increase in the labor force, the Fed likely will raise the Fed Funds rate another 75 basis points at its November meeting – as they said was their plan after their September meetings.
- Commodity, housing and used car prices are falling and supply chains have cleared. The big question is how much of this will be reflected in the September CPI inflation report out this week.
Higher U.S. interest rates are punishing U.S. stock prices, along with fears that a U.S. economic recession will also create an earnings recession. Historically, stock markets can perform well during rising interest rates cycles, but we are watching for signs of further trouble for equity prices.
- Bear Markets are no fun, but experience and perspective are helpful in staying balanced as we weather through the one that we have been in since the beginning of this year.
- From 1929 to 2021 there have been 26 bear markets averaging a -36% decline in stock prices and 27 bull markets averaging a 114% rebound in stock prices (Hartford Funds and Zacks).
- Rising interest rates negatively affect stock prices by putting downward pressure on price-earnings multiples. Earnings continue to grow, albeit at lower rates, but the outlook for nominal GDP and revenue growth is positive.
We continue to watch corporate earnings reporting, China’s economic turmoil, mid-term election trends and collateral damage from the ongoing war in Ukraine. Each can have a material impact on the outlook for stock market performance over the next 12 months.
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