| Growth is gently slowing, with activity still expanding at a solid pace
By: Edward Jones
DEWITT, Mich. - Nov. 21, 2023 - PRLog -- - The combination of consumer and employment data this month suggest that after a long stretch of above-average growth, we may begin to see some fatigue in household consumption and some cooling in the labor market. Yet that slowdown is only gradual and aids the Fed's effort to lower inflation. The reference of "switching to a slower lane, rather than swerving into the ditch" that we've made before will likely remain relevant for the next couple of quarters.
- Jobless claims are also in the same bucket of data coming in cooler but not too cold. Initial jobless claims rose to their highest since August, and continuing jobless claims also moved up, hitting their highest in two years. However, both remain about 30% below their historical averages over the past 50 years, which speaks to the solid starting point ahead of a potential deterioration1. With demand softening, companies will likely slow hiring to protect profitability. They might proceed carefully with layoffs, however, because overall demand for workers continues to exceed supply, as suggested by the still wide gap between the number of job openings and the number of unemployed.
Falling yields confirm a change in Fed policy - A key reason why both equity and bond markets have rallied in November is that the easing inflation pressures, together with signs of a cooling labor market, increase confidence that the Fed is likely done hiking rates. After core inflation hit its lowest reading in more than two years, markets were quick to price out a December hike and price in an earlier start to rate cuts. The Fed policy-sensitive 2-year Treasury yield declined below 5.0%, while the growth-sensitive 10-year yield declined below 4.5%1.
Investment implications - A preview into 2024? - The Fed-friendly data pushed both stocks and bonds higher, extending the November rally. But last week's market moves offered a slightly different flavor from what we've seen for most of the year, with leadership notably broadening.
- Up to this point, most of the equity-market gains have been driven by a small number of stocks, the so-called "Magnificent 7" (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, Tesla). Showcasing this point, the S&P 500 is now down only 6% from its all-time high in early 2022, while the equal-weight S&P 500, which assigns the same weight to all the stocks in the index, is down 12%. The Russell 2000, which is the proxy for small-cap stocks, is down 27% from its highs. Last week's outperformance from small-caps and the "average" stock potentially offers some insight into what might unfold in 20242.
Sources: 1. Bloomberg, 2. September FOMC meeting projections
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