As we step into the first week of trading in 2024, the market faces an immediate challenge. This crucial test comes with the impending release of the December jobs report on Friday morning.
Let’s navigate through the implications of the December Jobs Report with a keen eye on the unfolding dynamics.
Economic Calendar Highlights
This week, Meeting notes from the Federal Reserve, the latest job openings update, and fresh data on manufacturing and services sectors’ activity will be key highlights shaping market dynamics. Stay tuned for insights into these vital aspects of the economic landscape.
Turning our attention to the corporate sphere, a sparse week of results awaits with quarterly reports from notable players.
Cal-Maine Foods (CALM), Walgreen Boots Alliance (WBA), and Constellation Brands (STZ) take center stage in the upcoming releases. Additionally, Wall Street will closely monitor the quarterly delivery numbers from electric vehicle maker Tesla (TSLA) for further insights into market trends.
After a New Year’s Day break on Monday, trading is set to resume on Tuesday. Concluding last year with a roaring two-month rally, major indexes hit all-time highs or approached them.
Soft Landing Optimism and December Jobs Report
In 2023, the Dow Jones surged by 13.7%, surpassing 37,000 for the first time and adding over 4,500 points.
The S&P 500 gained 24%, nearing its record close of 4,796.56, while the Nasdaq Composite (^IXIC) marked its best yearly return since 2020, soaring by 43.42%.
The stock market rally at the close of 2023 was propelled by growing confidence in the possibility of a coveted “soft landing” for the US economy. This scenario envisions inflation easing to the Fed’s 2% goal without triggering a recession.
A crucial element in this narrative is the surprising resilience of the labor market, outperforming many expectations and contributing to the positive sentiment driving the markets.
Key elements of this narrative include the unemployment rate maintaining levels similar to when the Fed initiated its rate-hiking cycle. Additionally, the ratio of unemployed workers to job openings has reached its lowest point in over two years.
Furthermore, minimal increases in layoffs, as indicated by weekly jobless claims, contribute to the overall storyline of a resilient labor market, reinforcing the notion of a potential “soft landing” for the economy.
For some economists, these indicators suggest a labor market cooling sufficiently to prevent cash-flush consumers from driving inflation higher.
Importantly, this moderation doesn’t signal weakness to the extent of impending recession, providing a nuanced perspective on the current economic landscape.
Projections for the December jobs report align with this narrative. Anticipated December jobs report data suggests an addition of 168,000 nonfarm payroll jobs to the US economy last month, with a slight uptick in the unemployment rate to 3.8%, as reported by Bloomberg.
In contrast, November witnessed the addition of 199,000 jobs, accompanied by an unexpected decline in the unemployment rate to 3.7%.
Cautious Employment View, Fed Rate Cut Expectations, and Differing Expert Opinions
In a recent research note, Jefferies’ economics team, led by Thomas Simons, expressed a cautious outlook for 2024 regarding employment. They do not anticipate a sudden decline in employment but remain watchful.
Notably, with the UAW strike now resolved, they expect the volatility seen in manufacturing payrolls over the past months to stabilize.
As the new year begins, markets are positioning themselves with the expectation of a Federal Reserve interest rate cut in March.
Current data indicates investors assigning an 82% probability of a rate reduction by the end of the March meeting, according to the CME FedWatch Tool as of Tuesday.
While markets anticipate a March rate cut, economists, including Morgan Stanley’s chief US economist Ellen Zentner, lack a consensus on this expectation.
Zentner suggests that data, such as the December jobs report, must demonstrate more indications of cooling than currently seen for the market’s projection of a March cut to materialize.
Zentner’s Insights on Job Market Trends and Market’s 2024 Prospects
In a research note dated December 19, Ellen Zentner, Morgan Stanley’s chief US economist, emphasized that resilient labor markets showing a gentle downward trend suggest a potential delay in the initiation of interest rate cuts compared to what the markets currently anticipate.
According to Ellen Zentner, for the Federal Reserve to consider a rate cut in March, monthly payroll additions would need to drop below 50,000 by February’s report.
This would need to align with persistently low inflation readings, and crucially, the job slowdown would have to be a sustained trend rather than an isolated low reading.
A significant question for investors revolves around whether the late 2023 rally merely accelerated the anticipated gains for 2024 or if the market has the potential to extend beyond its current all-time highs.
The trajectory of the market in the coming weeks will likely provide insights into the answer to this pivotal question.
Historic Data Supports Gains, Bulls Cautious
Ryan Detrick, Chief Markets Strategist at Carson Group, highlights historical data supporting the notion of continued stock gains in 2024.
His research reveals that in years following a November and December S&P 500 rally of over 10%, as observed at the close of 2023, the benchmark average historically rose by an average of 19.5% in the subsequent year.
Despite optimistic outlooks, even some staunch market bulls, like Tom Lee, Head of Research at Fundstrat, acknowledge that the anticipated gains might not unfold in a steady upward trajectory.
Lee, with one of the highest S&P 500 targets for the next year at 5,200, foresees a potential decline for the major average early in 2024. He notes that, while new all-time highs are imminent, a consolidation phase is likely to follow.
Tom Lee identifies several key concerns that could exert pressure on markets. He anticipates investors becoming “itchy” regarding the timing of potential Federal Reserve rate cuts.
Additionally, Lee highlights a historical trend, noting that downturns around February or March in an election year are typical, adding an additional layer of caution for market participants.
Tom Lee provides a nuanced perspective, suggesting that after reaching new all-time highs, the S&P 500 might experience a modest pullback to the range of 4,400-4,500.
This aligns with his 2024 Year Ahead Outlook, where the base case anticipates the majority of S&P 500 gains occurring in the second half of the year.