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EPS Growth of 12% with 6 Rate Cuts? Really?
Over the past couple of months – I’ve been trying to reconcile the following: (i) can the market achieve 12% EPS growth; and in parallel; (ii) see the Fed cut rates 5 or 6 times this year? I ask this question as that’s what the market is pricing in. It feels like a contradiction. Can we achieve both? For example, if the Fed is forced to cut rates aggressively – what does that tell us about the health of the economy? I would assume it signals an economy in need of emergency assistance.
Market Confident on Imminent Rate Cuts Despite Inflation Print
Today we received the final monthly inflation report for 2023 – ahead of the Fed’s next policy meeting Jan 30-31. Markets were expecting very good news… but did they get it? On the surface, both prints were slightly higher than expected. However, we saw a mostly muted reaction in both bond and equity markets. Bond yields fell – with the market maintaining its 68% expectation of a rate cut as early as March.
Weighing Risk(s) More Useful than Forecasting a Number
Around this time of year – a wrath of ‘experts’ forecast where they believe the S&P 500 will finish the year. For me it serves little purpose. For one, most of the time forecasts are typically wrong (and by a wide margin). Second, as time goes by, more information will come to hand which often changes our view. From there, forecasts should be updated. Third, there are almost always random events which reset the game. What happens to forecasts then? They are typically tossed out the window. With that, let’s look at what the market “experts” believe we will see this year – and I will offer my approach.
Jobs Data: Choose Your Narrative
Today we learned that December added 216K jobs. CNN reported it as a “red hot” print. Was it? From mine, the headline number offers us very little. For example, what I want to know is the following (a) where are the jobs are being added (e.g. public vs private sector and what sectors); (b) what are people being paid per hour (is it rising or falling?); (c) are people working longer hours (as part time work doesn’t pay a mortgage); and finally (d) what’s the prevailing trend (as one month’s data doesn’t account for much). The headline number doesn’t provide this detail – therefore we need to dig a little. My quick take – this report is weaker than what the headline suggests.