Labor of Love

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The S&P 500 got a boost this week from the December U.S. employment report which showed both a robust jobs market and slowing increases in wage growth - a key indicator for the U.S. Federal Reserve. Wage growth dropped to .3% month over month and 4.6% year over year. For perspective, in March 2022, year over year wage growth was 5.6%.

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Wage growth is often referred to as one of the "sticky" causes of inflation, meaning it is hard to tame without massive layoffs across the economy to create a glut of workers willing to take lower pay. Wage increases enable us all to tolerate higher prices for goods and services, resulting in a vicious cycle of inflation. The fed's fight with inflation is not just about bringing prices down - it's also about keeping prices down and the tolerance for higher prices down.

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Forecasts show there is still a gap of over 4 million more jobs open than available workers, which contributes to wage increases as companies compete for talent. Powell has stated there will be "some pain" as the economy weakens, causing enough layoffs to lower the supply-demand gap in the labor market to sustain lower wage growth.

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This is the nice way of saying a lot of people are going to be fired and that's necessary to kill inflation. We've seen a good amount of this in recent weeks in our layoffs scenario from META, AMZN, GS, CRM, MS, PINS, etc. What you won't see are the private companies following the same pattern.

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Why does this matter?

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The Fed's inflationary target is 2%. This includes wage growth. On a forward looking basis, the wage growth is at 3.6% not accounting for deceleration.  If we assume wage increases will continue getting lower and lower each month from here on the trajectory it's been on since March, it's possible the Fed has done enough tightening already to hit their target of 2% inflation.

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In fact, the last CPI report showed that inflation has already come down to 2.4% on a forward looking basis. The problem is: if the trend stays, additional Fed tightening will fly us into deflationary territory and a recession.  

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This past week, the market rallied on the belief that inflation had been tamed and the Fed would be able to slow the rate of increases and/or stop the increases altogether. This belief assumes the Fed will not get the data wrong by focusing on lagging data indicators, or wait too long before changing course.

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Our take is the Fed will be slower to act than they could be due to fears of repeating the lessons of the 1970s when the Fed cut interest rates too soon, which resulted in the economy reflating again quickly. This implies the Fed will overdo it, and shrink the economy too much, driving down the markets further.

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On Friday, a group of bank stocks will report earnings. This kicks off earnings season. Large asset managers will be watching closely to see how the consumer is holding up amidst all the inflationary pressures and after many have depleted their savings to adjust to higher costs for everything.

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What can we do?

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For the past 9 months, we've recommended staying in cash and trading events until the bottoming process is finished. Stay the course.

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We get into more trade ideas and trend analysis in our Level 2 Newsletter.

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KNOWLEDGE CORNER: HEALTHY PROFITS

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In various newsletters last year, we noted that healthcare stocks hold up well in recessions and inflationary environments. In 2022, healthcare indexes easily outperformed the S&P 500.  

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Healthcare stocks are set to get another boost this week from the JP Morgan Healthcare conference. This is a big deal event where companies try to tout their therapies, devices, and new acquisitions.

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The sector ETF (XLV) has been selling off recently after a strong performance last year. You can see this in our Trends section. The selloff is typical of sector rebalancing where asset managers reallocate capital to underperforming sectors from those that performed well.

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There have been some significant recent events in the sector, including the FDA's approval of Biogen's Alzheimer's drug, Doximity's stock buyback, AXSM's progress in fighting Alzheimer's, and ISEE's Breakthrough Therapy designation which catalyzed shares 33%.

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It's likely the conference reignites more interest in the sector, and we've been analyzing the significant events of one healthcare company in the space as part of our ongoing Level 2 deep dives.

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HIGHLIGHTS FROM LAST WEEK

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Given the holidays and market closures, it was a pretty slow week for the market. But a few events are worth highlighting.

IDCC rises 17% on buybacks

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Telecom equipment maker Interdigital announced a large buyback on January 3rd and rose 17% over the following 3 days of trading.  

Bed, Bath, & Beyond Bankruptcy

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BBBY noted it may seek bankruptcy protections last week, as the company is burning through cash faster than it is able to manage with management changes. The stock dropped -30% on the news.  

The stock was a favorite meme trade for WallStreetBets and fell into multiple short squeezes over the past two years. The stock also garnered headlines after its CFO committed suicide in September.

Stitch Fix Patching Things Up

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Personalized clothing retailer Stitch Fix replaced its CEO and fired 20% of its workforce in an attempt to save the business. Investors cheered the move, and the stock rallied +9% as the cuts appear to be significant enough to get the company profitable, assuming no further revenue declines. The stock is down -80% over the past year.

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Key Earnings Announcements This Week

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January 9

• Jeffries (JEF)
• Tilray (TLRY)

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January 10

• Albertson's (ACI)
• Food prices still high? We'll find out when this grocer reports earnings

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January 11

• KB Home (KBH) - earnings will provide insights into how bad are homebuilders getting hit by higher interest rates?

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January 12

• Taiwan Semiconductor (TSM) - arguably the most important semiconductor will report on demand for semis and plans for expansion. Results will drive movements in other semiconductor stocks
• Infosys (INFY)

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January 13

• Bank stocks report to start earnings season and they will give us insights into consumer spending and borrowing
• Bank of America
• JP Morgan
• Wells Fargo
• Bank of NY Mellon
• Citigroup
• Delta Airlines report will give insight into forward demand for travel
• United Healthcare
• Blackrock

Economic Reports:

Jan 10

• Fed Powell Speech (1am EST)

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Jan 12

• Inflation Report (US CPI)
• US Jobless Claims

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Jan 13

• Michigan Consumer Sentiment Report

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The LevelFields Team