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Surging Job Growth

The markets spent much of the week lurching in starts and fits with each day’s earnings announcements.  Fortunately, the three major indices look to close higher this week.  However, volatility remains elevated and the volatility index, also known as the VIX, recently hit a high of 32.  Sometimes these periods are grounded in economic data, but more often it is a case of fear and uncertainty.  The good news is that these periods don’t typically last very long.  Even during the pandemic, the VIX, which spiked to 82, fell back to 20 by the end of the year.  I expect volatility to remain choppy for the next few weeks, until the bulk of earnings announcements are made and possibly leading up to the first interest rate hike in March.
Perhaps the biggest shocker this week was the jobs report which came out today.  In it, the U.S. economy added a higher-than-expected 467K jobs in January even with Omicron.  The expectation was for 150K new jobs, with one major analyst predicting a loss of 257K jobs.  The majority of the jobs were added in leisure hospitality, in professional and business services, in retail trade, and in transportation and warehousing.  The number of job openings stand at 10.925 million and appears to be growing as the unemployment rate increased to 4%, indicating more people began looking for work.  If anything, this should give the Federal Reserve enough cushion to begin raising rates in March.
With regard to interest rate hikes, the expectations are changing.  Initially, the Fed suggested we could see three rate hikes in the second half of the year.  Most analysts thought the Fed was being conservative and predicted four.  However, more recently the economic data has not shown any signs of slowing which has caused some analysts to suggest as many as five rate hikes and possibly a 50bp hike in March as opposed to a quarter point increase.  It is a tricky position the Fed finds itself in, with a balance sheet over $9 trillion and inflation that remains stubbornly high.  Expect this to remain a very fluid discussion.
Earnings announcements remain a mixed bag.  Technology companies and those peripherally related to tech (including some financial companies and some communication services companies) are having the most difficult time.  The Nasdaq closed down 9% in January, just barely avoiding its worst showing ever. Companies that beat on both the top and bottom lines AND gave good guidance also got hit as more speculative investors looked to lock in gains.  If good news results in a 5% pullback, you can imagine what a “bad” announcement looks like.  One example is Netflix which announced it is not growing its subscriber base as previously projected.  The stock fell 22% on the news and is down 31% YTD.  Facebook announced that for the first time ever, its daily use was down during the quarter and watched as $232B in market cap evaporated.  With the stock down as much as 24%, Mark Zuckerberg saw his net worth drop by $30B in one day.  Do these drops present buying opportunities?  In some cases, maybe.  However, it would be a mistake to look at a company in a vacuum.  It would also be a mistake to believe that because a stock is down xx% it can’t fall further.  For those willing to hold the position through a full business cycle, these drops may present buying opportunities, but require patience and fortitude.  
In closing, I mentioned a couple weeks ago that the Federal Reserve is now considering issuing its own cryptocurrency.  While being very coy about the whole thing, they insist it is just an exercise.  This week we learned the Boston Fed (one of the twelve regional Fed banks) is working with the Massachusetts Institute of Technology (MIT) to create open-source code for a hypothetical central bank digital currency (CBDC) that can process 1.7 million transactions per second.  The collaboration is called “Project Hamilton” and they insist it doesn’t aim to create a usable CBDC.  “This collaboration between MIT and our technologists has created a scalable CBDC research model that allows us to learn more about these technologies and the choices that should be considered when designing a CBDC,” said Boston Fed Executive Vice President Jim Cunha.  It’s strange how much time and effort is being put into something they insist isn’t part of the roadmap.  Now you know.

Bruce J. Mason, MBA