January 6, 2023

We had the December jobs report this morning.

The labor market remained tight last month, despite a Fed that has been verbally attacking jobs for the better part of the past year.

Why does the Fed want to induce a softer job market?   Wages.

In a labor supply shortage, employees should have leverage in negotiating higher wages, particularly in what has been a hot inflation environment.  With that, the Fed has feared an upward spiral in wages, where wages feed into higher prices, which feeds into higher wages … and so the self-reinforcing cycle goes.

It hasn’t happened.  Wages have well lagged the inflation of the past year.   And the wage component of the December jobs report showed no signs of trouble with wage growth.

How did markets do today?  Yields fell sharply.  Stocks were up big.

But much of the action today in markets was driven, not by jobs, but by another December report that came later in the morning.

The ISM services report showed a contraction in business activity in December, after 30 consecutive months of growth.

The last time the services industry contracted was covid.  The time before that was the Great Financial Crisis.

Related to this, take a look at the chart of services prices from this morning’s report …

This is important:  While goods prices and energy prices have been falling in the government’s inflation report, it has been services prices that have been persistently hot.  That has been the Fed’s rationale for “keeping at” the inflation fight.

As we’ve said here in my daily notes, the real-time data has been telling us for months that those services prices have been rolling over. It just hasn’t been reflected yet in the stale government inflation report.  This chart above supports that view.

And with that, the bond market is telling us that the Fed that has overdone it on rates, already.

January 5, 2023

With a split Congress we should expect Capitol Hill to be noisy, but with little-to-no action.  The latter is what matters.  No action in DC is a positive for the economy and markets, following the reckless, and inflationary policy making of the past two years.

Ignore the noise.

The catalyst for global markets and economies continues to be interest rates.

And as we discussed yesterday, we should see a much slower rate-of-change in interest rates in the U.S., relative to last year (maybe zero rate of change).  And with that, we should expect the interest rate differential between the U.S. and much of the rest of the world, to narrow (as other major central banks play catch up to the Fed’s moves of the past year).

A faster rate of change in foreign interest rates, relative to the U.S., means money will move out of the dollar (weaker dollar).

For those searching the world for value, with a catalyst, it can be found in emerging market Asia.  If history is our guide, this is likely where we will see the best stock market performance in the world over the next few years.

As of October of last year, Morgan Stanley says the decline in the MSCI Emerging Markets index had exceeded the decline in the previous 10 bear markets, including the 1997 Asian Financial Crisis.  Stocks in Hong Kong have already jumped nearly 50% since (October).

And now we have a catalyst in China for the Asia trade, with the Chinese government scrapping its zero covid policy, AND stimulating (both fiscal and monetary).

January 4, 2023

On this day a year ago the stock market posted the all-time high.

If you recall, coming into 2022, the Fed, staring down the barrel of 7% inflation, told us that they would tame inflation, and land close to their target of 2% by the end of 2022.  And, they told us that they would do so while producing a 4% growth economy (well above trend) at 3.5% unemployment (near record levels) — all while keeping the Fed Funds rate under 1%.

What did they do?  They took rates above 4%, crushed growth (induced a technical recession) and didn’t get near their inflation target.

As I said in my Pro Perspectives note last year this time, a new year can often come with regime change in markets.

We had the extreme of regime change.

Not only did we go from an easing to a tightening cycle, for global monetary policy.  But we went from a long-era of low inflation, and ultra-easy money, to a high inflation, and inflation fighting policy.

We went from a fed that was a fervent defender of financial market stability, and promoter of economic prosperity, to a Fed that explicitly attacked jobs and demand, and went to great lengths to talk down the stock market (in effort to tighten financial conditions).

With that about face, for anyone looking to earn investment returns, much less preserve buying power against inflation, there were few places to hide.  Not only did stocks do poorly, but bonds did worse — an outcome with few historical reference points in down stock markets and higher uncertainty environments.

The good news:  The rate-of-change in monetary policy tightening will slow dramatically this year (and could possibly be a zero rate-of-change, which would be a positive surprise for markets).  The rate-of-change in the fiscal policy madness will be zero, with a split Congress (= gridlock).  The latter takes pressure off of the Fed.

Remember, the Fed was ready to pause on rates at 2.25% back in July.  That was before the Biden White House and democrat-controlled Congress decided to greenlight another $1 trillion-plus spending binge.  The Fed won’t get sideswiped with any more ofthese surprises, with a split Congress.

On a related note, remember, going back to 1950, there has never been a 12-month period, following a midterm election, in which stocks were down. And the average one-year return following the eighteen midterm elections of the past seventy years was 15% (about double the long-term average return of the S&P 500).

Keep in mind, markets have priced in a lot of negative expectations (from the rate path, to earnings erosion, to recession).  That sets up for positive surprises.  Stocks like positive surprises.

What is among the best performing asset coming out of a bear market in stocks?  Small cap value stocks.  That’s precisely what we hold in our Billionaire’s Portfolio (with the extra kicker of a catalyst, often from the direct influence of a billionaire investor).  We significantly outperformed broader markets in 2022, and are positioned to have an explosive bounce in 2023 (perhaps similar to what we saw in 2016, where we bounced 40 percentage points from the low point of the broader market correction — outpacing the S&P by 2 to 1).

Click here to join me, and get your portfolio in line with ours.