Professor Siegel's Weekly Commentary Archive
Pleasing Last Week of Summer
September 5, 2023
The last week of summer provided a large batch of economic reports—and I think the Fed and really everyone should be pleased with the data and underlying health of the economy. Let's start our recap with Friday’s employment report.
The official hiring numbers looked low, especially the 110,000 downward revisions to past data. But the revisions were likely due to strikes and the closure of a large trucking firm. Many of those workers will be rehired eventually.
We also had a one-tenth increase in hours worked, rebounding from last month’s post-COVID low. This means the jobs report was not overly weak, but it confirms a downward trend in the pace of hiring. The most welcome data from the report was the jump in the participation rate to pre-pandemic levels. This added supply of workers caused the unemployment rate to jump unexpectedly to 3.8% —a 0.3% increase and the highest level in a year and a half.
More people in the labor force shows slack in the labor market that helps mitigate concerns for the Fed about wage inflation pressures and allows the Fed to hopefully not hike rates any further. I did not think the Fed needed even the last rate hike—when the inflation trajectory was on track to come down to the Fed’s targets. But wage pressures were one of their concerns and the increased labor force helps mitigate future gains.
Demand for hiring workers and new jobs openings as seen in the JOLTS data earlier last week was also down because productivity is up. Rising productivity trends are good for the Fed and offset the inflationary pressures.
Real economic data continues to come in strong. I don’t think the economy is growing at the over 5% levels we see in the Atlanta Fed GDP nowcasting framework, but we could easily see 2.5-3% levels. We do not have goods prices falling anymore, with the ISM Manufacturing prices paid report showing an equal split between rising and falling prices. Commodity prices are showing signs of stability.
Friday’s bond market reaction to all the employment data was rather strange. At first, the 10-year bonds ticked downward on easing of the labor markets, but on reflection of the underlying strength in GDP, yields rebounded to about 10 basis points higher on the 10-year. These rising long-term rates pressured higher duration growth stocks and assets like the Nasdaq. Also, on Friday Tesla came under more pressure on news of significant price cuts for a number of models—another positive sign for cooling inflation pressures but perhaps also a sign of weaker demand.
Small caps, value, and energy stocks had a strong relative rotation that could be rebalancing flows away from tech but also reflects signs of more stimulus coming out of China.
The data points to real interest rates staying high for a while. There’s almost no chance of another interest rate hike in September, and while the futures market shows some chance of a November hike, I think it very well could be the Fed is done hiking rates. The key question now is how long rates will stay this high. Resilience in the economy will be the ultimate test.
Last week we also had the Case-Shiller housing reports and money supply. The Case-Shiller housing data was up 0.9% on the month, but still slightly negative over last 12 months. Housing resilience with 7% mortgage rates remains one of biggest surprises in this market. There are not many transactions at these rates, but demand for housing remains very strong and the supply is very low.
The money supply showed a small increase and is now at around 3% since hitting its low in April. I would like it to be at a faster clip, but banks are still losing deposits. Almost $1 trillion left the banking system into money market funds since the Fed started raising rates—because the banks are not paying competitive 5% rates.
All the data taken together are good for profit levels. The 2024 S&P 500 estimated profits are higher now than they were a month ago—that's a rare event because normally analysts are overly optimistic and the estimates trend down as time goes on. That means the economy is stronger than expected and productivity is helping profits.
We’ve had a strong year so far, but I think we may see another 5% rise in the markets to close the year. The pressure from the Fed is decreasing, and the economic data and profits are coming in nicely. Certainly, some geopolitical pressures could re-assert and we have one of strangest presidential races in our history forthcoming (the majority of each party doesn’t like the presumptive choice). Anything can develop that could throw this forecast off track. But I am more optimistic than I was just a few months ago.
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