A weaker labor market may mean the Fed can cut rates amid benign wage inflation, says 22V strategist
Dennis DeBusschere of 22V Research argues that "a benign slowing" of U.S. economic growth may help to raise stocks.
A new week sees the S&P 500 eyeing a new record. Stocks are getting support from a strong corporate earnings season and a pullback in Federal Reserve interest-rate-hike expectations following Friday's weak jobs data.
As Scott Chronert and colleagues at Citi Research say in reference to the labor market: "Bad news is good news, for now!"
That interpretation rhymes with the thinking of 22V Research's chief market strategist, Dennis DeBusschere, who in a note published over the weekend argues that "a benign slowing" of U.S. economic growth may help push stocks higher.
The latest nonfarm-payrolls report - showing 23,000 jobs lost in July, when a gain of 83,000 had been anticipated -showed employment conditions continuing to ease even as economic activity remains firm. The employment-to-population ratio declined, while nominal wage growth is slowing.
For DeBusschere, that scenario is important because a cooler labor market can provide the economy with more room to grow before inflation becomes a problem.
"This easing labor market dynamic, counterintuitively, raises the implied speed limit for GDP growth," DeBusschere argues, now potentially putting it above 2%.
In other words, the economy may be running hotter than expected without generating the wage pressures that would normally force the Fed to slam on the brakes. Indeed, he suggests, the Fed can respond to demand shocks with rate cuts "as long as slack is increasing and inflation pressures from wages are easing."
Note that the consumer-price index data for July will be published on Wednesday.
In terms of the market, this dynamic does not necessarily mean lower Treasury yields, in DeBusschere's view. A higher sustainable growth rate lifts the economy's equilibrium interest rate, or what's known as R*. He therefore expects 10-year Treasury yields BX:TMUBMUSD10Y to remain around 4.5%, reflecting a "firmer" longer-term growth outlook.
And that combination - stronger sustainable growth, easing inflation pressure and a Fed with room to cut rates - could be particularly powerful for stocks.
A more durable expansion, says DeBusschere, should mean lower equity risk premiums, the extra return an investor expects to make from the stock market above a safe, risk-free investment. That increases the potential for further gains for stocks.
Also supporting equity valuations is the improvement to profitability provided by the use of artificial intelligence, according to DeBusschere. What he admits to be an "unscientific" extrapolation of corporate claims of AI-linked efficiencies shows businesses enjoying an average 150 basis points of margin improvement.
DeBusschere thinks that such a boost to profitability, along with the lower ERP, or equity risk premium, may help the S&P 500 SPX reach 8,500 on a roughly 12-month horizon. And because of his optimism about the U.S. economy he favors cyclical stocks over defensive plays.
The markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are mostly up as Treasury yields BX:TMUBMUSD10Y nudge higher. The dollar index DXY has risen, and gold futures (GC00) are trading around $4,408 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 7757.64 3.58% 2.41% 13.32% 21.41% Nasdaq Composite 26,690.62 5.19% 1.56% 14.84% 24.43% 10-year Treasury 4.657 -2.20 3.70 48.50 36.80 Gold 4406.6 7.19% 9.93% 1.72% 29.84% Oil 78.94 -1.40% 1.21% 37.50% 23.34% Data: MarketWatch. Treasury yields change expressed in basis points
Take control of your news. Make MarketWatch your preferred source on Google.
The buzz
Berkshire Hathaway $(BRK.B)$ revealed over the weekend that second-quarter profit more than doubled after gains from stock investments.
Oil prices (CL.1) (BRN00) climbed Monday as the market grew wary that a new deal between the U.S. and Iran - which would help reopen the Strait of Hormuz - has yet to materialize.
Apple $(AAPL)$ was downgraded to underperform by analysts at Jefferies, who say they think a plan to create an all-glass version of the iPhone was canceled.
Cleveland Fed President Beth Hammack takes part in a Yahoo Finance interview at 3 p.m. Eastern.
Private credit is under growing strain, despite industry's upbeat tone.
The chart
"Gold has seen a nice rally off recent lows as the dollar has pulled back," says Jonathan Krinsky. technical strategist at BTIG. "However, it now is nearing strong resistance in the [$4,400- to $4,500-an-ounce] zone which was some prior support, the 200-day moving average which is close to inflecting lower, and the downtrend from all-time highs," he adds.
Top tickers
Here were the most active stock-market ticker symbols on MarketWatch as of 6 a.m. Eastern.
Ticker Security name SPCX SpaceX NVDA Nvidia TSLA Tesla MU Micron Technology TSM Taiwan Semiconductor Technology PLTR Palantir Technologies AMD Advanced Micro Devices AAPL Apple MSFT Microsoft SNDK Sandisk
Brazilian soccer player's goal-celebration drama.
-Jamie Chisholm
Comments