Stock market participation continues to broaden with increasing participation from many diverse industries.

Highlights for this week include:

Recent labor market reports remain consistent with a cooler but still healthy labor market with signs of lower wage inflation. While manufacturing conditions remain sluggish, they are also consistent with lower inflation. These reports support the end of the Federal Reserve’s (Fed’s) interest rate hiking campaign and are also consistent with the soft landing (no recession with lower inflation) narrative.

Despite the poor start to the new year, we remain encouraged by the stock market rally. Stock market participation continues to broaden with increasing participation from many diverse industries. We are also encouraged by the cyclical leadership, which is also consistent with a healthy market.

Higher bond yields had been a major headwind for stocks over the past two years, and the 10-year Treasury yield remains in a well-defined downtrend. The downtrend also remains intact on the U.S. dollar (a risk-on signal).

Labor Market Conditions Softer but Still Healthy – Consistent with a Soft Landing

The labor market has clearly cooled from the overheated conditions earlier in this business cycle but remains resilient with job creation and a low level of layoffs. The JOLTS and ADP private payrolls reports, and weekly jobless claims are all consistent with this.

The JOLTS report showed job openings fell in November, down in six of the past seven months, to 8.8 million, the lowest level since March 2021. However, this is still well above the pre-pandemic level of 7 million. The quit rate declined to 2.2%, its lowest level since March 2021, indicating weaker worker confidence than earlier in this cycle. It points to the continued erosion of the wage premium of job switchers over job stayers, which should contribute to continued moderation in overall wage growth.

The ADP private payroll report showed an increase of 164,000 jobs in December, the most in four months, suggesting continued labor market strength at year end. However, the ADP estimate of wage growth continued to moderate, with the median change in annual pay down to 5.4%, the least since August 2021. The report noted a diminishing risk of a wage-price spiral.

Weekly jobless claims dropped 18,000 to 202,000, with continuing jobless claims falling to 1.855 million, a six-week low. The four-week averages of both initial and continuing claims are hovering near pre-pandemic levels and are low by historical norms, which suggests that labor demand remains robust.

These reports are consistent with the Fed’s objective of higher interest rates to cool inflation, including wage inflation, while maintaining job creation to support economic growth (i.e., a soft economic landing).

Manufacturing Conditions Remain Sluggish but Consistent with Lower Inflation

The ISM Manufacturing PMI (a monthly business survey) picked up 0.7 points in December to 47.4 (below 50 signals contraction), a three-month high. Although the pace of decline eased at yearend, the index remained in contraction territory for the 13th consecutive month. Additionally, only one industry (Primary Metals) registered growth last month. The breadth of decline is the worst since the 2008 financial crisis and is consistent with falling manufacturing output.

Importantly, the ISM Prices Index fell 4.7 points to 45.2, partly due to lower energy prices. It has been below 50 since May, indicating falling raw material and other input costs. This suggests continued disinflation in producer and consumer prices.

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