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A strong jobs report arrived after a mostly mixed week for economic indicators.
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This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Piping-Hot Jobs Report
Talking Points
BMO Capital Markets Economic Research
bmo.com
Feb. 4: After a mostly mixed week for economic indicators, which suggested the U.S. economy cooled moderately at the start of 2022, the U.S. employment report was a lightning bolt of surprising strength. Lulled by a back-up in jobless claims in the month, widespread reports of workers off sick, and ADP estimating a big, 301,000 drop in jobs, markets were caught looking the wrong way. Not only did the headline 467,000 payroll gain blow past the highest estimate, but the prior month also was cranked up to a gain of 510,000 (initial guess, 199,000)….
This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
While the U.S. jobless rate nudged up last month, that was due to a big pop in the participation rate to 62.2%, its highest level since March 2020. The companion household survey reported a massive, 1.2 million job gain in January, and it’s now within 1.1% of returning to prepandemic levels (versus a 1.9% gap on payrolls). But perhaps the most noteworthy aspect of the employment release was another piping-hot reading on average hourly earnings, which zipped 0.7% month to month, lifting the annual pace to 5.7%. Juiced by revisions, this was half a point above consensus, and simply further fuels rising inflation anxiety.
—Douglas Porter
“See Ya at $100/bbl”
Portfolio Strategy Incubator
Canaccord Genuity Capital Markets
cgf.com
Feb. 4: Our focus is on oil prices, with West Texas Intermediate rising above $90 a barrel. OPEC+ countries are failing to increase production at the previously agreed pace of 0.4MM bbl per month. While the cartel reiterated its commitment this week to increase supply, it seems like several OPEC+ countries can’t produce as much oil as expected, reflecting low investments to increase/maintain their pumping/storage capacity during the pandemic, and unplanned outages. U.S. production has recovered somewhat but remains far from prepandemic levels.
Global oil demand has fully recovered, nearing 100MM bbl/d, and according to our energy analysts, commercial airline demand remains at only about 60% of 2019 levels. With U.S. and Canadian producers being more focused on returning cash to shareholders, as opposed to funding new brownfield projects, we believe oil price risks remain tilted to the upside. That said, higher oil prices and the associated rise in bond yields can be interpreted as a tax on global growth. Therefore, the real test for oil prices should come in the second half, following steady, albeit subdued crude-oil supply increases, several Fed rate hikes, a projected economic growth slowdown, and some demand destruction caused by higher prices.
Until then, oil prices are behaving as if they were telling us, “See ya at $100/bbl.”
—Martin Roberge
Bullish on Small-Cap Value
Putman Equity Insights
Putnam Investments
putnam.com
Feb. 3: Last year, U.S. economic growth rose at its highest rate in 50 years, with the exception of 1984. After a dismal 2020 and despite recurring waves of Covid-19, gross domestic product, or GDP, roared back to a 5.7% annual growth rate in 2021. This is very good news for small-cap value stocks—an asset class investors have ignored for years.
Investors started to pay attention to small-cap value last year, as the promise of strong growth began to trickle down to the more economically sensitive businesses in this investment universe. In 2021, small-cap value stocks outperformed their large-cap value and large- and small-cap growth peers. However, the longer-term numbers tell a different story. For more than a decade through 2020, small-cap stocks, especially small-cap value stocks, underperformed their larger and growth-oriented peers.
Today, we believe conditions are ideal for small-cap value to experience prolonged outperformance. Small-caps should benefit as the economy rebounds from the depths of the pandemic and growth broadens beyond select work-from-home tech beneficiaries. A resurgent economy combined with higher inflation could bring double-digit nominal growth rates to a wider swath of the investing universe. This should attract investors to the long-neglected small-cap value space.
—Michael C. Petro
Savvy Stock-Screening Idea
Derivatives Strategy
Evercore ISI
evercoreisi.com
Feb. 1: A year ago, equity markets and the retail investor seemed invincible. The “sky was the limit” as greed ruled, call option volumes skyrocketed, and “meme” and “concept” stocks—cannabis, SPACs, clean energy, as well as “profitless tech” and biotech— soared to new highs on the wave of emotional optimism. Until they stopped soaring and began crashing. Sentiment now stands in 180-degree opposition to a year ago. Pessimism rules. Could the same meme/concept/profitless stocks now heavily shorted and universally reviled be set to rally? We recently screened for names down 50% or more from their first-half 2021 peak with short interest greater than 10% of their float. Such stocks could be positioned to do a 180-degree turn should “cooler heads prevail” and the credit market’s nonchalance to the stock selloff be correct.
—Julian Emanuel, Michael Chu, Barak Hurvitz
High Quality vs. High Dividend
Insight and Commentaries
Washington Crossing Advisors
washingtoncrossingadvisors.com
Feb. 1: Where do you want to be invested when faced with the prospect of a bear market? Some say that high dividend yields provide protection when stocks fall. This implies that since the yield rises as the stock price declines, new buyers will be attracted as the price drops. Such buyers could help establish a “floor” below the stock. While this sounds good in theory, we find scant evidence that it actually works in practice.
This strategy fails when needed most because “high yielders” tend to be fundamentally weak. While some high-yielding stocks may be good bargains, most reflect poor quality or poor growth prospects. We believe that owning the most flexible, durable, and predictable high-quality stocks during a downturn tends to be a better option.
—Kevin R. Caron and team
Yield-Curve Dynamics
Weekly Market Commentary
Winthrop Capital Management
winthropcm.com
Jan. 31: The first month of 2022 proved to be volatile for all markets. The media has its eye on the
VIX
index, which is currently above 30, and indicates a measure of heightened equity volatility. We are watching the MOVE index, which tracks the volatility of the U.S. Treasury market. At 85, it is up 70% from the close of the third quarter of 2021. This has come on the heels of the Fed beginning to step away from the punch bowl.
During the same time frame, the rate on the 10-year U.S. Treasury has increased 50 basis points [0.5 percentage point] to 1.80%, the highest level since the start of the pandemic. The most concerning signal from the bond market is the yield curve. While the long end of the curve is certainly rising, the short end is rising much faster. Over the past year, the yield curve, as measured by the two-year to 10-year interest rate, has fallen from 160 basis points to 59 basis points. The market is far from an inverted curve; however, this is a clear signal of an economic slowdown. At its current position, it would only take three rate hikes of 25 basis points to push the curve into inversion. Currently, the market is pricing in four rate hikes.
—Gregory J. Hahn, Adam Coons
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