The jobs report on Friday showed that 236,000 jobs were added to the workforce. The unemployment rate fell to 3.5% from the previous 3.6%, and the labor participation rate increased to 62.6%. Labor force participation is the number of people working or actively looking for work. This is an important number because an economy can only grow by increasing output and efficiencies or having a larger working base. We’re finally starting to see our labor force come back from being depressed due to the pandemic. From January to now, two million people have been added to the labor force, and the number of job openings has fallen by roughly half a million. Back in January, there were around 1.75 job openings to unemployed people. Now it’s down to approximately 1.65 job openings to unemployed people. The lower it is, the better. Another point regarding the jobs report is that average hourly earnings growth was 4.2% year-over-year. A 4% increase in your pay is excellent; however, inflation has increased to around 6%. Taking 6% inflation and adding 3.5% unemployment gives you a Misery Index of about 9.5%. We’re watching that closely because it shows the amount of pain that people may be experiencing in their jobs and their lifestyles within this economy. It’s a great gauge and allows us to see if the consumer will move forward with spending money or if they will retreat, as well as other things taking place in the economy.
Inflation has been a headline that the US consumer has felt. You can see it when you drive by gas stations and go to the grocery store, and we see it in consumer spending. The way the market looks at inflation, though, is how it relates to what the Federal Reserve will do. Will the Fed have to continue to raise interest rates, or will they pause? Historically, the Federal Reserve has stopped raising interest rates when the Fed Funds Rate is higher than the inflation rate. Today, the Fed Funds Rate is at 5%, and the last inflation reading was 6%. The next Fed meeting will be May 3rd, but we will see updated inflation data on Wednesday. Expectations are for the Consumer Price Index to drop to 5.2%, close to 5%. If that number aligns with expectations or is better, the Fed might pause raising interest rates. If it stays higher, the Fed may continue to be aggressive. Wages are up over 4%, which is an excellent raise, but if prices are going higher than that, that’s where you get the risk of stagflation. Stagflation is when prices are higher than the economy can grow. It’s not a positive sign overall, but it could be a positive for corporate America. If prices are rising at 5%, but employment is rising at 4%, there is a chance that companies are pocketing that 1.5% spread. These are the most significant data points we will see before the Fed meets on May 3rd. We must watch the data closely to see if we can bring the Misery Index down with these two data points.
With current concerns in the market being around bank strength and some companies announcing layoffs, we are analyzing the current balance sheet of corporations to see if the concerns are legitimate. One number we like to look at is the current cash equivalent holdings of the companies that compromise the S&P 500. On a chart shown in this episode, you will see a quarterly snapshot of the total cash and cash equivalent holdings of the companies comprising the S&P 500, a barometer of financial strength. Seeing the S&P 500 Index cash holdings suggests that America’s largest companies appear to be on solid footing, in our opinion. Total cash and cash equivalents fell from $1.89 trillion in Q4 2020 to $1.58 trillion in Q4 2022. Still, the decline may be related to share repurchases and dividend distributions, in our view. Stock buybacks and dividend distributions for companies in the S&P 500 Index set record highs in 2022, coming in at $922.7 billion and $564.6 billion, respectively. Furthermore, companies will often utilize cash as they engage in M&A and invest in property, plant, and equipment, among other capital expenditures. The record-setting pace of recent stock buybacks and dividend payments could be viewed as a vote of confidence by corporations in their ability to weather current economic headwinds. Time will tell, but broadly speaking, companies in the S&P 500 seem well-capitalized and gives us hope that the market can remain stabilized through the current noise in the economy.
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