Things seem to be backward concerning the stock market and the economy right now. The better the economic data, the worse the stock market performs. Especially when it comes to job reports and the unemployment rate.
September non-farm payrolls rose 263,000. Simultaneously, unemployment dropped to 3.5%, with over 10 million job openings still left to fill. Traditionally, strong economic data would create positive stock market returns, but not with inflation hitting 40-year highs.
The stock market is more concerned with future expectations than current conditions. In the market, current economic data is used to create future expectations that, in turn, create current valuations.
The Federal Reserve is trying its hardest to slow the economy down, increase the unemployment rate, and as a result, lower inflation. If job growth remains strong, inflation will continue. Fewer jobs mean less money available, which then results in lower inflation. That is the theory, at least. This means that every strong economic indication results in further rate hike expectations. Unfortunately, the fastest rate hikes in history have not slowed things down enough.
Is the speed at which rate hikes are occurring faster than the economic feedback? Probably, with one glaring exception being the housing market. Both homes sold and houses being built have fallen off a cliff in the last 12 months, as that industry is very sensitive to interest rates.
A term I have heard a few times to describe the current environment is a rolling recession. With GDP rising at a real annual rate of 2.6% for Q3, it's hard to imagine the current state of things as a recession, but there are sectors, like housing, experiencing real pain.
This pain may be trickling into the tech sector too. Many high-profile tech companies are announcing layoffs or hiring freezes (Apple, Microsoft, Google, Amazon, etc.) in response to the direction of the overall economy. And at the same time, the services and energy sectors continue to see robust growth.
A rolling recession as interest rates and inflation move through different sectors of the economy at different times is sounding more and more accurate with time.
As always, please reach out with any questions!
~ Austin Smith, CFA
*Numbers and Data Sourced from First Trust’s Economic Blog, and the Wall Street Journal