While the Fed remains poised to raise interest rates further, the economy continues to hum along—defying most experts' expectations.
The U.S. Economy Continues to Defy Expectations
Economic data to start the new year has been stronger than expected, and that has many investors worried.
Some readers may read that sentence and wonder – why would investors be worried about a healthy economy? I'll explain why below. First, let's dig into some of the data defying expectations that the U.S. is headed for a pronounced economic slowdown.1
I'll start with U.S. manufacturing and services surveys, which give strong insight into factory activity and overall levels of demand. In February, S&P Global's index of services businesses rose to 50.5, pushing it back into expansion territory and marking the strongest reading in eight months (any reading above 50 marks expansion). U.S. companies that participated in the surveys reported their first growth in output since last summer and indicated optimism about activity in the months ahead.
Even though economic data is showing signs of strength this year, there is no way to know exactly what comes next in the market. It is important, though, not to make rash moves and put your investments at risk. Instead, your investment portfolio should reflect decisions based on data and fundamentals.
I recommend that investors look at our just-released March 2023 Stock Market Outlook report. This report contains some of our key forecasts to consider such as:
Zacks forecasts for the months ahead
Current asset allocation guidelines
Zacks Rank industry tables
Our latest commentary and outlook on equity markets
And more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
In manufacturing, February's index reading rose to 48.4 from 46.9 in January. While still contractionary, the improvement suggests that activity is contracting at a slower pace, and manufacturers indicated that softer demand has allowed them to work through the backlogs that remain a legacy of the pandemic. Both manufacturers and service providers pointed to the easing of supply problems and also lower overall inflation for raw materials. Survey respondents also broadly signaled a positive outlook from here, which is not what investors were expecting at this juncture.
The other key area of economic strength is one I've pointed to many times in previous columns – the U.S. labor market. Hiring accelerated briskly in January with payrolls surging by 517,000, which was about 300,000 more jobs than Wall Street consensus estimates for the month. January delivered the largest payroll gain since July 2022, which pushed average job growth over the last three months to 356,000 – well above the 163,000 per month added before the pandemic.
Importantly, initial jobless claims – which is a proxy for layoffs – ticked lower in the last week of February, which suggests that employers continue to desperately cling to workers. First-time applications for unemployment benefits fell to 183,000, which is the lowest reported level since April 2022. The unemployment rate fell to 3.4% on these reports, which is a 53-year low.
Layoffs Continue to Hover at Very Low Levels
Source: Federal Reserve Bank of St. Louis 3
Firm wage growth has accompanied the strong jobs market. In January, average hourly earnings grew by 4.4% year-over-year, which followed a 4.8% year-over-year gain in December. Since inflation has been drifting lower as wages move higher, the effect on "real income" has been positive, which has continued to support consumer spending. In January, retail sales unexpectedly jumped 3% from December, which reversed the previous two months of declines.
Overall, what we're seeing so far in 2023 is an economy cruising at 30,000 feet, not one that's starting its descent. This gets back to my earlier comment about investors being worried. An economy that's pushing ahead, expanding employment, raising wages, and seeing strong levels of spending is the opposite of what the Federal Reserve wants to see. For some, that's problematic.
We already know the Fed is poised to raise rates by 25 basis points at the March and likely the May meetings. A 'stubbornly' strong economy raises the possibility of the Fed pushing rates even higher than currently expected, which some argue would come as a negative surprise to markets. It's gotten to the point where many investors are fixated on Fed policy as the make-or-break factor for the economy and stocks in 2023.
But a key point I think is being overlooked is the effect that a stronger-than-expected economy could have on corporate earnings. Over the past year, analysts and CEOs have been bracing for an economic downturn, which has seen earnings estimates for 2023 march lower (see chart). At present, S&P 500 earnings are expected to decline by -0.2% for the year.
Zacks Investment Reseach 4
But what happens if economic resilience translates to corporate earnings resilience, and earnings throughout 2023 surprise strongly to the upside? Would fear of higher rates outweigh the benefits of stronger-than-expected earnings? Ultimately, I think the answer is no.
Bottom Line for Investors
In my view, it is counterproductive to want unemployment to rise and for the economy to falter just to increase the possibility of the Federal Reserve 'pivoting' to lower rates. This mindset places too much emphasis on the Fed's role in determining economic and earnings growth, which means placing too much emphasis on how much the Fed influences equity market performance over the long term.
As the year unfolds, I recommend that investors get a hold of their investments by focusing on key forecasts in the market. I am offering our Just-Released March 2023 Stock Market Outlook Report, which will provide you with insights and additional factors to consider, such as:
Zacks forecasts for the months ahead
Current asset allocation guidelines
Zacks Rank industry tables
Our latest commentary and outlook on equity markets
And more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Zacks Investment Management was born out of one of the country's largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we've developed to design customized investment portfolios based on each client's individual needs. The end result is investment management that is research driven, results oriented and client focused.
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2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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