Economic slowdown is “good news” for stocks: Strategist

The U.S. Job Openings and Labor Turnover Survey (JOLTS) saw job openings fall to 8.06 million in April of 8.355 million in March, marking the lowest level since February 2021. Piper Sandler Chief Investment Strategist Michael Kantrowitz joins Market Domination to discuss the state of the job market and what it could signal for the Federal Reserve interest rate change.

“When you look at the broader employment data, from nonfarm payrolls to the unemployment rate, temporary jobs, hiring plans, layoff rates, etc., there has been an underlying slowdown going on for about a year. points are slower than they are strengthening,” explains Kantrowitz. He adds that this is “good news” for stocks as it helps calm inflation fears, explaining: “I think we have a long way to go before We have to worry about a really hard landing that will bring down stocks across the board.”

Kantrowitz notes that the negative correlation between rates and stocks will continue until inflation concerns improve. He expects two rate cuts by the end of the year and says economic factors such as low oil prices, high fiscal spending and a flexible labor market will help offset the impact of higher interest rates.

For more expert insights and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video transcript

The number of job openings in the US hit a new three-year low in April.

The latest sign of a cooling labor market ahead of Friday’s big jobs report, which weakens the labor market, could help bolster the case for the Fed to cut rates in 2024.

Our next guest expects two cuts with us by the end of the year.

Now to discuss all of this, Michael Kantrowitz, Mike Piper Sandler, chief investment strategist Michael.

Good to see you on set.

So let’s start there with the economic data, because we got more of it this morning and labor demand looks to continue to moderate.

It’s kind of, you know, this kind of general beat right now, maybe some softer data that we’re getting.

What do you think?

What does this mean for the market?

Yes, I think it’s more of the same as the chart you just showed, it was just a downtrend that has been going on for some time.

Uh There was a certain acceleration this month.

But, um, when you look at the broader employment data, from nonfarm payrolls to the unemployment rate, temporary employment hiring plans, quit rates, etc.

There is an underlying slowdown that has been going on for about a year.

It’s broadening, so there are more data points slowing than strengthening.

The story continues

Uh, I still think it’s good news for stocks as it helps contain inflation rates.

And I think we still have a long way to go before we have to worry about a really hard landing, bringing stocks down broadly.

Um, one of the charts in your last note I thought was really interesting where you talk about a possible generational shift in investor psychology and, you know, over the last decade we’ve had yields and stocks going in the same direction that reversed the few decades before that.

We’re now seeing another reversal where we’re going to see a renewed inverse correlation, but between earnings and equities and what is that, what does that mean?

What are the implications of this?

Yeah, you know, my whole career I started at approximately 0203. basically until COVID, we had a positive correlation between interest rates and stock prices.

Um, but that basically to me tells us that nobody is really worried about inflation and when rates go up, stocks, the economy is improving, markets are going up.

Um, again over the last 20 years, there hasn’t been a lot of concern that’s changed with COVID, it’s changed because of zero rates and these big financing refinance gaps that we have in commercial real estate, residential real estate, corporate credit.

So I think because of that, this negative correlation between rates and stocks is going to persist for a while longer, you know, in the seventies and eighties, it happened because we had very high levels of interest rates and inflation.

We don’t have really high levels.

We just have these big differences between rates because of zero interest rates.

So I think there’s a lot of reasons, but until we see investors not worried about higher inflation, higher interest rates, a rise in rates when the data improves.

Uh, I think we’ll continue to see that negative correlation, not literally every day.

I know that today yields have dropped a lot in the last few days, actually.

And stocks didn’t really react positively.

But, you know, if you run this correlation over a very short period of time, you’ll see that it changes a lot.

Whereas I look at about six months to really capture a regime and it’s been pretty negative over the last couple of years.

We mentioned that you expect two FED cuts this year.

And what, what if that, what if it didn’t come to fruition and you didn’t have cuts, would that change your view of the market?

Does the market need cuts to continue rising?

Uh, I think parts of smaller cap, you know, mid cap areas that don’t really have robust or broad earnings strength.

Yeah, I think regional banks, transportation stocks, real estate stocks, you know, it’s a long list.

Again, this all goes back to all these names that are rate sensitive.

The large-cap growth index?

Does the 500 need lower rates?

Not necessarily because there’s still earnings growth, will growth, uh, will, will stock prices rise as much without rate cuts or if the 10-year yield stays here?

No, I don’t think so.

Then.

Um, I think if rates stay where they are for longer, it’s more of what we’ve seen with this large-cap quality growth, leadership, small-cap value under performance.

And at the same time, even though we’ve gotten some, or maybe more than some, negative economic data right now, you again, in your most recent note, talk about maybe some stabilizing factors that are propping up the economy that give it a little bit of optimism that, I mean, maybe things aren’t fantastic, but maybe they’re not much worse.

Yeah, I’m taking a little bit of the bearish economic side and a little bit of the bullish economic side and kind of landing in the middle, um, of the bullish economic stories that, you know, oil prices are low.

We have a lot of fiscal expenses.

We have a flexible labor market, a strong wealth effect from the boomer generation and all of this will prevent a recession.

Well, maybe, but with all that said, we see the shocks data coming in weaker, we see, you know, weaker underlying earnings, when we look more broadly.

So we are seeing a slowdown with all of this, but perhaps that means a more moderate slowdown.

Perhaps this is why some, some like me and others last year, were wrong to call for an earlier recession because of these mitigating factors.

And so I think the golden environment today is that it continues to offset some of the high impact of higher interest rates and that we continue to work slower, and not fall off a cliff like the previous recessions that we’ve seen and Michael, we’ll sort it out. to add for viewers.

We are listening now.

Um, given that kind of point of view that you have, where do you see opportunities in the stock market?

What are you examining?

Still, you know, quality companies with higher profitability?

Uh, I think one of the interesting sectors is public services.

Uh, I kind of said I could play Iron Man, uh, offense and defense.

It’s a football reference, uh, American football.

Uh, so the utilities have certainly been on the attack over the last couple of months, playing with the AI ​​kind of story and the drop in ’47 yields about a month ago.

And if things get worse and the bad news becomes bad for stocks and, uh, I assume rates would come down and utilities might be your kind of safety play, uh, since they have the most earnings scenario. stable.

So other than that sector, generally just looking for stocks in different sectors and industries that have the best earnings momentum relative to their peers and, and very quickly, utilities is unusual because it’s already had a run.

Even rates didn’t fall because of all this.

Now a thesis on them too, but do you think they have more room to move forward if rates fall.

Yes, I think if we end up having a sharp recession, things will get worse.

Utilities will be the last part of the market that will remain there.

Maybe, again, maybe not the AI ​​stocks that led the change, but you will see a rotation within utilities into more stable securities like stocks.

And that’s perfect because today we have our manual on public services.

So we’ll also get some specific names of people on how to play this.

Thank you very much.

Good to see you.

You too, thank you for being here.

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