Highlights for this week include:

• The February employment report showed that the labor market remains consistent with economic growth and is not sending a recession signal. While uncertainty centered on government spending cuts and tariff impacts remain high, job and wage growth have consumers well positioned for future spending.
• The NFIB small business survey fell on increased uncertainty, consistent with other business and consumer surveys. This suggests slower future spending and puts the spotlight on next Tuesday’s retail sales release for February (after January’s weak, weather-impacted reading).
• Major market averages remain in or near correction territory, reflecting softer-than-expected economic readings and uncertainty around government policy. We note that pullbacks are common occurrences, and usually present good buying opportunities. Given our outlook for further economic growth, we continue to recommend that investors stay focused on their long-term investment plan.

The Labor Market Remains Healthy and Consistent with Economic Growth

Nonfarm payroll employment rose 151,000 in February with the unemployment rate ticking up to 4.1% from 4.0% in January. This has the 3-month average employment growth standing at a solid 200,000. Private payrolls were up 140,000, with gains broad-based across goods- and services-producing industries. Conversely, government payroll growth slowed to 11,000 (from 44,000) amid a 10,000 decline in federal employees, likely reflecting some early effects of the DOGE layoffs, which are likely to show up more substantially in future readings.

Average hourly earnings rose 0.3% in February and are up 4.0% in the past year while total hours worked increased 0.1% in February and are up 0.6% in the past year. Average hourly earnings have now fallen to the upper end of what the Fed would consider consistent with its 2.0% inflation goal. Importantly, the personal income proxy (employment x hourly earnings x workweek), which provides the fuel for future consumer spending, remains at a healthy 4.3% on a six-month annualized basis.

In addition to the February jobs report, the Job Openings and Labor Turnover Survey (JOLTS) remains consistent with a healthy labor market. The January JOLTS estimates indicated solid labor demand at the end of January, with job openings rising to 7.74 million from a downwardly revised 7.51 million in December. It was in line with the average job openings in the fourth quarter of 2024 (7.72 million). January's JOLTS reading amounts to 1.13 job openings per unemployed person, just a touch above July's recent low (of 1.06) and somewhat below pre-pandemic readings in the vicinity of 1.2.

Inflation Encouragingly Lower but Still Sticky

The February Consumer Price Index (CPI) data delivered a welcome downside surprise, after a sharp increase in January. Core CPI inflation (excludes volatile food and energy) decelerated to 0.23% m/m (3.1% y/y), almost entirely reversing the uptick in January, while headline inflation slowed to 0.22% m/m (2.8% y/y), helped by a lower impulse from food and energy prices. While February’s reading was encouraging, inflation remains stubbornly above above the Fed’s 2.0% target. The interest rate market is consistent with the Fed remaining on hold at its next couple of meetings.

Small Business Optimism Reflects Policy Uncertainty

The NFIB Small Business Optimism Index fell by 2.1 points in February to 100.7, the fourth consecutive month above the 51-year average of 98 but it is 4.4 points off its most recent peak of 105.1 in December. Of the 10 Optimism Index components, three increased and seven decreased. The Optimism Index moderated in February while its level of uncertainty spiked. Small business owners have experienced uncertainty whiplash over the last four months, with uncertainty falling from October’s highest ever 110 reading, to 86 in December, and then back up to the second highest reading ever of 104 in February.

This survey is consistent with other business and consumer surveys that have declined due to concerns around potential tariffs and government spending cuts. This is also consistent with slower future spending.

Stock Market Dynamics Reflect Significant Uncertainty

The major market averages (S&P 500, Dow Industrials, and Nasdaq) remain in or near correction territory. This reflects recent soft economic readings, including consumer spending, and uncertainty surrounding government policy (tariffs and cost cuts) reflected in business and consumer surveys.

We note pullbacks and consolidations are common, even during bull markets. The key market risk going forward is a major further deterioration in the economic outlook. The S&P 500 has experienced a median annual drawdown of 10% during the last 40 years, with severe drawdowns associated with recessions. The S&P 500 has declined by a median of 24% from peak to trough around recessions since WWII.

However, S&P 500 corrections are usually a good buying opportunity. Looking at the 21 cases of corrections of 10% or more since 1980 shows recessions associated with 7 and no recession associated with 14. At six months following the down 10% threshold, stocks are up on average about 10% in the no recession case and about 4% in the recession case. At one year following the down 10% threshold, stocks are up on average about 12% in the no recession case and are up about 1% in the recession case.

This highlights the importance of upcoming economic growth data for the trajectory of the equity market. As noted above, the incoming data remains consistent with further economic growth, albeit slower. We continue to recommend that investors stick with their long-term investment plans.