Private Client Group

January 9th, 2023

Unemployment Claims Drop, Inflation and the Stock Market, China’s Economic Woes

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In today’s Steady Investor, we are taking a deeper dive into key factors that we believe are impacting the market and what’s to come this upcoming year, such as:

The U.S. Labor Market is an Ongoing Headache for the Fed – Headline inflation in the U.S. is heading in the right direction, with goods inflation falling significantly in the second half of 2022 as supply chain pressures eased and commodity prices fell from peaks. Falling goods inflation is good news, but the services side of the equation continues to cause problems for the Fed’s view on overall inflation. Fed Chairman Powell’s biggest concern is the effect the tight labor market has on wages, which in many cases influences companies to raise prices to make up for higher costs. Powell specifically remarked that  “the labor market continues to be out of balance, with demand substantially exceeding the supply of available workers.” Data released this week didn’t help. The Labor Department reported that job openings in the U.S. remain above 10 million (as of the end of November), which far exceeds the roughly 6 million Americans out of work. Initial jobless claims in the final week of December – which gives a read on layoffs –fell by 19,000, which signals that employers continue to cling to workers. What’s more, according to a recently issued report by the Atlanta Fed, workers who stayed at their jobs experienced an average wage bump of 5.5% in November 2022 compared to the year prior, which is higher than the 3.7% wage growth reported in January 2022 and also marks the largest increase in 25 years. A persistently tight labor market is a problem for the Fed and also for the market’s hope for a “Fed pivot” in 2023. Ongoing tightness in the labor market could cause inflation to become entrenched, which also implies the need for higher rates.1

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Market volatility concerns come with a lot of worries from investors about how to manage their investments if the market reaches bear market territory.

Don’t despair! You can potentially avoid the most harmful hazards of a bear market on your investments by making use of some useful tools I offer in our free guide – The Zacks Bear Market Survival Kit.2

This guide discusses some key tools to prepare for a bear market, including:

 
In this guide, you’ll get our viewpoint on the most important moves you can make to weather a recession. Don’t wait—if you have $500,000 or more to invest, get this guide before the storm hits.
 
The Zacks Bear Market Survival Kit2

The Fed vs. The Stock Market – A closer look at the minutes from the December 2022 Fed meeting show a central bank increasingly concerned about stock market rallies. Part of the issue is that investors are anticipating a sharp decline in inflation in 2023, which in turn has driven hope that the Fed would stop raising rates and perhaps even lower them in 2023. The gap between where the market thinks inflation will land in 2023 and where the Fed sees inflation is meaningful – according to Barclays, the bond markets are projecting the consumer price index will fall to 2.6% by the end of 2023, which would arguably put the Fed’s preferred PCE price index very close to the 2% target. Meanwhile, the Fed raised its 2023 core PCE inflation forecast from 3.1% to 3.5% at its most recent December meeting. The Fed is increasingly concerned that the market’s optimism over lower inflation will also drive hope over a “Fed pivot” in the new year, which in turn will lead to market rallies. The problem with market rallies, according to the Fed, is that easing financial conditions could hurt their efforts to cool hiring and wage growth, which as mentioned above is a top concern.3

China’s Economy Suffers, for Now – China’s economy continues to reel from the hangover of “zero Covid” policies followed by the rapid spread of the virus as restrictions were lifted. Activity in China’s manufacturing and services sectors has plummeted to levels last seen during global economic lockdowns. China’s purchasing managers index (PMI) dropped to 47.0 in December, and anything below 50 signals a contraction. But that wasn’t even the worst data point – in the key services sector, PMI fell from 46.7 in November to 41.6 in December. The transition to an open economy is likely to be messy in the first quarter, particularly as winter months combined with low levels of natural immunity make handling Covid outbreaks much more challenging. But at the same time, a trough in economic activity argues for a strong rebound once the transition to reopening has taken place, much like the rest of the developed world experienced in 2021. The Chinese government has also signaled a willingness to inject fiscal stimulus into the economy, which could boost growth in the second half of the year and contribute to a rebound in the broader global economy.4

What Happens to Your Investments in a Bear Market? Investors should remember that inflation and volatility is a natural (if unpleasant) part of the economic cycle, but you can potentially avoid the most harmful hazards of a bear market on your investments by making use of some useful tools we offer in our free guide, The Zacks Bear Market Survival Kit.5

This guide discusses some key tools to prepare for a bear market, including:


If you have $500,000 or more to invest, get our free guide today. You’ll get our viewpoint on the most important moves you can make to weather a recession. Don’t wait—get this guide before the storm hits.

Disclosure

1 Wall Street Journal. January 5, 2023. https://www.wsj.com/articles/unemployment-claims-fell-during-holiday-week-11672926674

2 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

3 Wall Street Journal. January 4, 2023. https://www.wsj.com/articles/fed-minutes-show-officials-feared-markets-optimism-could-complicate-inflation-fight-11672859245?mod=djemRTE_h

4 Wall Street Journal. December 31, 2022. https://www.wsj.com/articles/chinas-economy-reels-as-beijing-lifts-zero-covid-measures-11672459264?mod=Searchresults_pos3&page=1

5 ZIM may amend or rescind the “The Zacks Bear Market Survival Kit.” guide for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.
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