Something for Everyone

Economic data has provided encouragement for both stock market bulls and bears.

Economic data continues to provide evidence to satisfy both optimists and pessimists. Even if stocks look relatively expensive and investor sentiment seems to have become more exuberant (which tends to be a contrarian signal) since the recent low in October, the good news is that market breadth is in a healthier position as 2024 begins.

As inflation continues to recede, we expect Treasury yields to continue to trend lower. The prospect of interest rate cuts by the Federal Reserve should be positive for the bond market, although we expect volatility to remain elevated. Meanwhile, a new European fiscal agreement may help some countries emerge from recession unimpeded by the harsh fiscal adjustments that would have been required under the old rules.

U.S. stocks and economy: This or that?

As has been the case for most of the post-pandemic period, economic data points have had enough to satisfy optimists' and pessimists' biases. Labor market data—in particular, the monthly jobs reports—have perhaps been the best examples of providing enough evidence for both the economic bulls and bears.

For instance, December's jobs report looked great on the surface—with 216,000 jobs created, an unchanged unemployment rate, and still-strong earnings growth. Yet, revisions resulted in 71,000 fewer payrolls in October and November; the unemployment rate was unchanged because of the decline in the labor force; and household employment fell by nearly 700,000 individuals.

To be sure, there are still several labor data that look relatively strong in level terms. As shown in the chart below, the prime-age labor force participation rate is at a healthy level relative to its plunge during the pandemic. However, rates of change matter more at potential economic inflection points. As such, investors should pay attention to the renewed downturn over the past few months. If it continues, it would signal increasing weakness in labor supply.

Labor force participation turning lower