Market Insight
2024.07.09 09:01
Mid-Year Outlook: U.S. Stocks and Economy
Certain segments of the economy and stock market have experienced much stronger recoveries
this year, underscoring a severe bifurcation between the "haves" and "have nots."
Establishment's dominance
When the monthly labor market report is released by the Bureau of Labor Statistics, the
two headlines that cross the wires first are the payroll change and the unemployment rate.
What many don't realize is that those indicators come from different surveys. Payrolls are
derived from the BLS establishment survey, while the unemployment rate is derived from the
BLS household survey.
Particularly pronounced in this cycle has been the widening spread between the two
surveys, with continued strong payrolls alongside much weaker employment at the household
level. Over the past two years, the establishment survey suggests 6.9 million jobs have
been created; while the household survey suggests it's less than half of that, at 3.2
million. For what it's worth, the household survey tends to be more accurate at important
turning points in the cycle. The household survey also dissects the types of jobs being
created, with the latest data showing a record year-to-date plunge in full-time jobs. The
contraction in full-time employment is in definitive recession territory based on history.
Looking ahead, we expect that there will continue to be notable divergences between the
two surveys; but that with upcoming "benchmark revisions" associated with the Quarterly
Census of Wages and Employment some "catching down" by payrolls relative to household
employment will unfold.
The all-important consumer and the real deal on incomes
As analysts of the economy and markets, we often tend to be in the weeds of data. Per
inflation, although there is heightened focus on headline vs. core inflation, rates of
change for both month/month and year/year readings, base effects, etc.; the typical
consumer is focused on levels. Consumer confidence has been dented by the simple fact that
prices remain significantly higher than they were pre-pandemic.
Consumer confidence has been dented by the high cost of living; clearly more pronounced
down the income spectrum. In terms of the path forward for these cohorts, inflation is
likely to be the primary needle-mover for the trajectory of lower income confidence, while
job security may hold the key to the trajectory of higher income confidence.
Additive to the more acute pain being felt down the income spectrum is the rub of where
inflation has been stickiest. Most of the common breakdowns of inflation statistics are
along headline vs. core readings. However, a more relevant breakdown in this cycle might
be discretionary vs. non-discretionary components of inflation metrics.
More about longer-term yields
We now appear to be in an inverse relationship era that is starting to mirror the start to
what we've been terming the "Temperamental Era" from the mid-1960s to the mid-1990s. That
was an era marked by greater inflation volatility and a generally negative correlation
between bond yields and stock prices. At least for the remainder of this year, we expect
this correlation to remain negative. More persistence in this relationship beyond this
year would, in our view, be a confirming sign that a new era is upon us.
In sum
The roll-through of strength and weakness within the economy continues, but the backdrop
is increasingly characterized by distinctive bifurcations. We believe in the disinflation
story, but a slow slog with bouts of volatility, leading to jumpy expectations around Fed
policy. Absent a swift move down in core inflation, the green light for the Fed to begin
easing policy likely rests with the labor market.
In terms of the stock market, a benign Treasury yield backdrop should be supportive of the
stock market; but a sharper move either higher or lower would likely lead to weaker
performance and/or higher volatility. In other words, a "goldilocks" scenario would
continue to be supportive, but the likelihood of that persisting is diminishing.
Concentration risk reigns supreme among the cap-weighted indexes, with underlying churn
and weakness likely to persist. But that underlying weakness also tends to provide
opportunity, with a continued emphasis on quality.
Note: This article is contributed by (1) Liz Ann Sonders, Managing Director, Chief
Investment Strategist, Charles Schwab & Co., Inc., and (2) Kevin Gordon, Senior Investment
Strategist Charles Schwab & Co., Inc.
ET Net News Agency Limited
website:www.etnet.com.hk
email:cs@etnet.com.hk
Data Source：ETN
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