All Eyes on Jobs Data

Thoughts on the Market vor 2 Jahren

0:00

4:22

Our CIO and Chief US Equity Strategist explains why there’s
pressure for the August jobs report to come in strong -- and what
may happen to the market if it doesn’t.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief US Equity Strategist. Along with my
colleagues bringing you a variety of perspectives, today I'll be
talking about the importance of economic data on asset prices in
the near term.

It's Tuesday, Aug 27th at 11:30am in New York.

So let’s get after it.

The stock rally off the August 5th lows has coincided with some
better-than-expected economic data led by jobless claims and the
ISM services purchasing manager survey. This price action
supports the idea that risk assets should continue to trade with
the high frequency growth data in the near term. Should the
growth data continue to improve, the market can stay above the
fair value range we had previously identified of 5,000-5,400 on
the S&P 500.

In my view, the true test for the market though will be the
August jobs report on September 6th.

A stronger than expected payroll number and lower unemployment
rate will provide confidence to the market that growth risks have
subsided for now. Another weak report that leads to a further
rise in the unemployment rate would likely lead to growth
concerns quickly resurfacing and another correction like last
month. On a concerning note, last week we got a larger than
expected negative revision to the payroll data for the 12 months
ended in March of this year. These revisions put even more
pressure on the jobs report to come in stronger.

Meanwhile, the Bloomberg Economic Surprise Index has yet to
reverse its downturn that began in April and cyclical
stocks versus defensive ones remain in a downtrend. We
think this supports the idea that until there is more evidence
that growth is actually improving, it makes sense to favor
defensive sectors in one's portfolio. Finally, while inflation
data came in softer last week, we don't view that as a clear
positive for lower quality cyclical stocks as it means pricing
power is falling.

However, the good news on inflation did effectively confirm the
Fed is going to begin cutting interest rates in September. At
this point, the only debate is how much?

Over the last year, market expectations around the Fed's rate
path have been volatile. At the beginning of the year, there were
seven 25 basis points cuts priced into the curve for
2024 which were then almost completely priced out of the market
by April. Currently, we have close to four cuts priced into the
curve for the rest of this year followed by another five in 2025.
There has been quite a bit of movement in bond market pricing
this month as to whether it will be a 25 or 50 basis
points cut when the Fed begins. More recently, the rates
market has sided with a 25 basis points cut post the
better-than-expected growth and inflation data points last week.

As we learned a couple of weeks ago, a 50 basis
points cut may not be viewed favorably by the equity market
if it comes alongside labor market
weakness. Under such a scenario, cuts may
no longer be viewed as insurance, but necessary to stave off hard
landing risks. As a result, a series of 25 basis
points cuts from here may be the sweet spot for equity
multiples if it comes alongside stable growth.

The challenge is that at 21x earnings and consensus already
expecting 10 percent earnings growth this year and
15 percent growth next year, a soft-landing outcome
with very healthy earnings growth is priced. Furthermore,
longer term rates have already been coming down since April in
anticipation of this cutting cycle. Yet economic surprises have
fallen and interest rate sensitive cyclical equities have
underperformed. In my view this calls into question if rate
cuts will change anything fundamentally.

The other side of the coin is that defensive equities remain in
an uptrend on a relative basis, a dynamic that has coincided with
normalization in the equity risk premium. In our view, we
continue to see more opportunities under the surface of the
market. As such, we continue to favor quality and defensive
equities until we get more evidence that growth is clearly
reaccelerating in a way that earnings forecasts can once again
rise and surpass the lofty expectations already priced into
valuations.

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