Phil Sees Shadow, Market Still Shines

Punxsutawney Phil made it official on Wednesday, predicting six more weeks of winter before a cheering crowd in Pennsylvania. While many of us were contending with the wintry affects from Phil’s prediction this week, the celebratory mood on Gobbler’s Knob managed to extend to Wall Street where the S&P 500 mustered a second consecutive weekly gain. Blowout earnings from mega-caps Google, Amazon, and UPS reignited bullish sentiment, but that was tempered in part by the strength of January’s jobs report and inflation concerns, causing the 10-year treasury bond yields to jump to 1.92%. The 10-year is now at its highest level since January 2020. Economists had widely expected that the rise of Omicron would dent hiring for the month, but businesses managed to navigate around the variant, adding 467K to their payrolls. Factory floors and service businesses also managed to keep Omicron at bay with both the ISM Manufacturing and Services indexes continuing to expand for the month. With economic and earnings reports showing resilience in January, the S&P 500 skated to a 1.55% weekly gain. 

How About Them Payrolls

Prior to its release on Friday, Wall Street had been ready to throw in the towel on January’s nonfarm payrolls over fears that the Omicron variant would stall hiring. Coming into the week, the consensus estimate was that only 150K new hires would be added, but workers and hiring managers brushed off the variant, adding 467K to the payrolls for the month. Surprisingly, in-person jobs such as leisure and hospitality led the way in new job creation. The sector managed to add 151K jobs. Professional and business services also scooped up talent during the month, adding 86K new hires. It remains a job seeker’s market. Wages surged 0.70% for the month and are now 5.70% higher than they were a year ago. Helping matters, the report also showed labor force participation increased by 0.30%, resulting in an overall participation level of 62.20%. The combination of waning stimulus payments, the effectiveness of vaccinations, and the overall desensitization to each additional variant wave is getting more folks back to work.  

Factory Floors Hold the Line

Labor shortages, supply chain bottlenecks, and rising prices failed to derail assembly lines in January. The ISM Manufacturing Index eased to 57.6 in January. This was down only slightly from December’s 58.8 reading. Despite the dip, the number remains firmly above 50, a line which indicates continued expansion in the manufacturing sector. January’s downward inflection was driven by shortages of critical intermediate materials, difficulties in transporting products, and fewer workers on factory floors due to Omicron. Those pressures should be alleviated as the current wave subsides. Prices at the factory gate also continued to increase with the survey’s measure of prices paid by manufacturers increasing to 76.1 in January from 68.2 in December. The reading suggests inflation will remain a thorn in consumer and business’s side for a bit longer. Despite the index’s slight downtick from December, demand for manufacturing remains decidedly strong.

Omicron Hits Production

Similar to the pattern seen in manufacturing, the ISM Services PMI Index slipped slightly to 59.9 in January, down from 62.3 in December. Business activity softened as Omicron reduced staffing levels and disrupted operations. The business activity sub-index fell to 59.9, down from December’s 68.3. Employment also eased with the employment sub-index falling to 52.3 from 54.7 the previous month. Comments from the ISM Services noted the public sector is finding it hard to hold on to workers. A growing number of employees have decided to jump ship to the private sector, lured by higher wages and in some instances 100% remote work options. The dip in services activity should be temporary and rebound strongly as Covid cases decline and workers hit by Omicron go back to work.

Going back just two weeks ago, the market was fretting over signs of stagflation – stalling growth, rising interest rates and inflation. Blowout earnings from mega cap names and strong economic data this week swung opinion back around and the markets along with it. Reports from Google and Amazon demonstrated that many businesses remain confident in their outlook, and businesses continue to pour billions into advertising and partnerships on their platforms. Even old school, industrial giant UPS managed to show Wall Street how it is possible to grow profits amid a challenging inflationary environment. Drawing on recent experience, analysts had been using the Delta variant as its predictor for the economic fallout from Omicron. That now appears to have been overly conservative. You can point to certain industries and aspects of the economy that have been impacted, but business has generally proven to be more resilient in keeping operations running this time around. Markets are still seeking equilibrium, hoping that the economic data remains strong on the one hand, but not so strong as to encourage the Fed to raise rates by 50 bps in March. That is the needle they are hoping to thread. This week, the market got the data it needed to set aside its slowing growth concerns, but with the huge jobs report and a Fed that claims to be “data dependent”, you could start to see interest rate concerns take center stage again if data keeps coming in hot.