What Happened: Initial Jobless Claims 218k vs. expectations for 220k

What Does it Mean?

Despite daily headlines of private sector layoffs, the general employment picture remains robust. I’ve been scratching my head over this of late since it doesn’t seem to make sense until I dug a bit deeper into the incredible Non-Farm Payroll number we reported on last week. If you read the report HERE one may conclude, as I have, that while certain areas of the job market may be in decline, other areas of the job market are soaking up the work force very quickly. In my opinion this may be coming from government or public spending primarily through the infrastructure bill. It is fascinating to observe that as quickly as the private sector is contracting, the government spending side continues to spend.

Why Do we Care?

The Fed may be in quite the pickle here if the headline job numbers don’t begin cooling. In my opinion it will be very difficult for the Fed to reach their targeted 2% inflation rate with such robust jobs numbers. Unfortunately, it may be the case that the Fed maintains rates too high for too long thus killing the private sector. By the time the data reflects what the Fed is looking for, it may be too late. Time will tell but it is fascinating to watch it play out.

A real estate investor I have followed for many years spoke on the subject recently which I found incredibly insightful. Please take a moment to watch this clip at the end of this Twitter post HERE

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What Happened: Credit Card Delinquencies Surge

What Does it Mean?

US consumers are buying things they can’t afford and are now beginning to struggle with paying those bills. One reason may be the higher interest rates they’re paying. Wallet Hub asked me to comment on this, which can be found HERE.

Why Do We Care?

As investors we’re always on the lookout for challenges that may lie ahead. While we remain incredibly bullish on the current environment, to not be aware of the economic uncertainties ahead would, in my opinion, be incredibly reckless.

I asked one of my best students, Jorden Droege to chart the historic differences between unemployment and credit card balances. I wanted to see what it looked like, from a visual perspective and if folks began spending more on credit when they had job security.

My inference was simple. Historically, do folks rack up credit card debt when unemployment is low and what happens when they start losing jobs? Well, as you can see in the following chart, historically this seems to play out with the last time credit balances being this high was as we moved into the financial crisis. Ironically, jobs were also plentiful with unemployment incredibly low. Unemployment began to surge and we all remember what happened after that.

Source: Jorden Droege; Dated: February 9, 2024

In my opinion it’s really quite simple. When people have jobs, they don’t seem to care too much about debt. When those jobs are lost, it’s another story.

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What Happened: S&P 500 crosses 5,000

What Does it Mean?

Once again the broad general market hit new highs this week. Moreover, at the time of this writing, the Small Cap index, still 20% off all-time highs seemed to perk up adding almost 2% and as much as we may not be in favor of their businesses practices it looks as if China may have bottomed as their government prepares to stimulate their economy back to life.

Why Do We Care?

While it is fun to cheer on the S&P, many indices and other sectors remain well off highs. In our opinion this speaks to the opportunity still in play for these areas. While we’re not too inclined to chase big cap tech here, we are finding value among other areas. Goldman Sachs agrees issuing a report on this very subject matter HERE

I continue to ask myself what will bring all the money on the sidelines back into the market. In my opinion most people aren’t aware of the significance of the S&P at 5,000 however should the Dow cross 40,000 that may spark some enthusiasm and attention. Without looking ask yourself how far the Dow would have to travel to cross 40,000.

At the time of this writing, it would be a whopping 3.5%.

Other

I had the privilege of sitting down with the folks from CNBC this week to discuss a few stocks and their earnings reports. You may find that clip below.

Until next time

~ Quint

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