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Bullish Employment Supports our S&P Target of 5,750


Bullish Employment Supports our S&P Target of 5,750

New York, NY, InfraCap Market Update - The employment report was very bullish for stocks and bonds with an enormous revision to last month’s too hot 353k print to only 229k. This month’s headline number was in the Goldilocks range of 275k with the unemployment rate going up to 3.9% and wages only going up .1% for February. The solid employment growth number supports our no landing scenario with our GDP growth forecast in the 2% range for 2024.

This cooler than expected employment report makes a June Fed rate cut much more likely as the Fed’s flawed inflation model assumes that inflation is driven by the labor market. We still would only give a June rate cut a 50% probability with a 50% probability of a July cut. Our conservative forecast is based on our concern that CPI will continue to print relatively hot due to the BLS’s deeply flawed methodology of estimating shelter inflation. Specifically, the BLS changed the weighting of single-family homes in the estimate of owners equivalent rent which makes prints for shelter inflation in the .6% area likely for the next 5 months. The resulting slow decline in PCE Y/Y inflation may cause the Fed to wait until June.


Certain members of the FOMC, including Goolsbee, understand the flaws of the shelter component, but most members are locked into the Fed’s overly rigid policy framework of focusing on PCE Core Y/Y without adjusting for methodology flaws. Even if the Fed does not cut in June, we believe we will have a significant summer rally as the ECB’s Lagarde strongly signaled a June rate cut at yesterday’s press conference, which would likely drive global bond prices significantly higher and bolster stocks.

We expect sectors that have lagged since the Fed’s rate increases started will outperform during a summer rally. We expect small cap stocks to lead the market as those stocks have been unfairly punished during the downturn and trade at large discounts to large cap stocks. We also expect income stocks such as preferred stock and large cap dividend stocks to outperform the market as a whole as global rates drop in response to central bank rate cuts.


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