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Goldilocks labor market, inflation and the Fed

December 13, 2023

Overall, major U.S. equity indexes traded slightly higher last week courtesy of a “just-right” monthly employment report. By last Friday’s close, the S&P 500 tacked on 0.21%, the Nasdaq 100 rose by 0.54%, and the Dow Jones Industrial Average closed nearly unchanged—higher by 0.01%.

 

S&P 500 Highest Close of Year

 

The broadest measure of the U.S. economy, the S&P 500, closed on Friday at its highest closing level of 2023—a great time to be a disciplined long-term investor!

 

Bulls were not roaring as loudly last week as they had been in recent weeks, as they were primarily waiting for the big jobs number on Friday.

 

Last week’s gain for the S&P 500 marks six consecutive weeks of gains.

 

Smooth and Steady Jobs Report

 

Market participants wanted to see a “just-right” number heading into the big jobs number last week, and they got their wish!

 

Jobs data for November implied somewhat of a “Goldilocks” scenario, with nonfarm payroll data showing a seasonally adjusted gain of 199,000 jobs in November, versus the Dow Jones estimate of 190,000. This figure was above the October gains in payrolls of 150,000, with the data interpreted as ”just right”.

 

Many of the recently created employment opportunities have been in the healthcare and government fields.

 

The jobs number coming in very close to expectations is welcome news for the markets, as less volatility in actual labor market results versus expectations can be seen as constructive.

 

Market watchers are enthusiastic about the present labor market picture showing signs of the economy experiencing a soft landing (as opposed to a recession) as the economy begins to cool.

 

As an added bonus, the U.S. unemployment rate dropped to 3.7% versus expectations of 3.9%, further adding to the goldilocks-like theme.

 

Treasury Yields Drop Further

 

After touching the 5% level in October, the 10-year Treasury yield has fallen drastically, closing last week near 4.244% and helping to fuel the rally in U.S. stocks.

 

Has it fallen too far, too fast? It’s possible.

 

While the drop in yields has provided the necessary backdrop for equities to rise in November and now into December, a further plunge in yields could garner concerns about retriggering inflation.

 

For now, lower yields are more than welcome for U.S. stocks. Let's see how the Consumer Price Index (CPI) data affects bond yields this week.

 

Inflation Data on Tap

 

On that note, with the November jobs report out of the way, attention this week will turn to the CPI data on Tuesday morning, followed by the Fed rate decision and subsequent commentary on Wednesday.

 

The monthly consumer price index for November is expected to show a year-over-year increase of 3.1% after last month's data showed an increase of 3.2%.

 

The monthly CPI data has been trending lower since peaking back in July of 2022, where year-over-year increases in prices ran at 9.1%. We have come a long way!

 

It's Fed Week

 

It's a double whammy this week, with CPI on Tuesday and the Fed on Wednesday. The consensus is that the Fed will leave rates unchanged this week, with the CME FedWatch Tool showing a 97.1% probability of such an outcome as of last Friday's market close.

 

More important will be the Fed's written statement and commentary, through which investors will gauge the Fed's mood going forward.

 

Putting It Together

 

Life can move fast; so can the financial markets. It has been a remarkable change in tune for the financial markets in just a mere five weeks. 

 

It is fair to say that very few people saw the size of the stock market rally coming in November and now leading into December. As long-term investors, we will take it! Sticking to our plan and strategy is the discipline that gets things done.