Overview
Stocks were modestly higher in premarket trading on Thursday as investors digested the latest jobs data and its potential impact on Federal Reserve policy. The major indexes closed lower on Wednesday, extending losses from 2023 amid concerns over rising rates and the economic outlook. However, better-than-expected jobs numbers on Thursday brought some optimism that the Fed may slow its pace of hikes.
Futures tied to the Dow Jones Industrial Average rose 0.2% while S&P 500 futures ticked up 0.1%. The tech-heavy Nasdaq 100 futures climbed 0.5%. Gains remained muted across indexes as traders awaited December jobs data for further clues on the strength of the economy and monetary policy.
Solid December Jobs Report
The closely watched nonfarm payrolls report showed employers added 223,000 jobs in December, higher than economists’ forecasts. The unemployment rate fell to 3.5%, matching a 50-year low. The data signals ongoing resilience in the job market even in the face of high inflation and rising rates.
“The December employment report came in strong, suggesting the likelihood of a soft landing has increased,” said Ryan Detrick, chief market strategist at Carson Group.
However, wages rose less than expected at a 4.6% annual pace. Slower wage growth could ease some of the Fed’s concerns about a wage-price spiral. Markets are now pricing in a smaller chance of further big rate hikes from the central bank.
Traders have pulled back expectations for the Fed’s peak rate to around 5% by June. Bets on rate cuts starting later this year have also increased. The next policy decision comes on February 1st.
Market Reaction
The solid jobs data initially lifted yields on the benchmark 10-year Treasury note to 3.71% from 3.68% as investors braced for more Fed hikes. However, yields later eased back to around 3.69% as hopes grew for an eventual pivot. The U.S. dollar index also ticked 0.4% higher before paring gains.
Among individual stocks, Apple shares fell 1.8% in premarket after Bank of America downgraded the tech giant on concerns over weakening consumer demand. Heavy machinery maker Caterpillar dropped 1.6% on a downgrade from Deutsche Bank. On the upside, Tesla jumped 5.5% on better-than-expected quarterly deliveries.
Outlook
While the latest jobs data highlighted ongoing strength in the economy, other indicators have shown signs of slowing. Manufacturing and services PMIs softened in December, prompting traders to pare some rate hike bets for the European Central Bank and Bank of England.
Investors are hopeful that easing inflationary pressures both domestically and abroad will allow central banks to slow their aggressive tightening campaigns. Markets have staged a rebound from 2022 lows on optimism that a soft landing for the economy remains in reach.
However, risks still abound. Many strategists caution that even if inflation continues trending down, any renewed surge could force central banks back into restrictive mode. Geopolitical tensions, debt crises in emerging markets, and other shocks could also impede the growth outlook.
After January’s dismal start, stocks may struggle to maintain momentum ahead of the next policy decisions. Earnings season also kicks off next week, providing critical updates on consumer demand and corporate health amid higher rates.
Sector Performance
Technology and communication services stocks have suffered most in 2023’s market decline amid valuation concerns and slowing demand. However, some analysts expect these cyclical sectors to lead any sustained rebound. Further dovish pivots from the Fed could spur speculative bets.
Energy has been a rare bright spot thanks to high oil and gas prices. However, if global growth continues cooling, commodity markets may come under pressure. Defensive sectors like healthcare and utilities have held up better than most and offer some safety during volatility.
Below is a breakdown of year-to-date performance by sector:
| Sector | YTD Returns |
|---|---|
| Energy | +2.3% |
| Utilities | -0.9% |
| Healthcare | -1.5% |
| Consumer Staples | -1.9% |
| Financials | -4.2% |
| Industrials | -4.5% |
| Materials | -5.1% |
| Real Estate | -6.2% |
| Technology | -10.3% |
| Communication Services | -11.7% |
Data as of January 3 close
Healthcare and energy stocks seem relatively attractive if central banks successfully engineer a soft landing. But a deeper downturn would likely hit commodity markets while boosting software and internet companies. The path of monetary policy and economic trends will determine leaders in 2023.
Analyst Comments
-
“We believe equity markets are appropriately pricing recession risk that remains front and center,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. Policy uncertainty prevails.”
-
“Given risks to earnings amidst a murky macro backdrop, we recommend quality stocks with strong balance sheets and free cash flow generation,” Morgan Stanley strategists wrote.
-
“We advise a barbell approach, balancing exposure to defensive and growth sectors while avoiding overvalued stocks,” said Bank of America. “This should help mitigate macro volatility.”
-
“With support appearing for stock prices, we think a grind higher can unfold even as the economy slows. We’d look for buying opportunities in tech,” said Wells Fargo Investment Institute.
As the conflicting analyst takes indicate, perspectives on markets remain mixed given the crosscurrents of data. But an incremental shift to rate cut hopes has put a floor under stocks for now.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
