Wall Street’s main indexes started the new year on a negative note amid rising concerns of upcoming recession, fuelled by further evidence of a strong labour market, which spurred worries that the Federal Reserve could keep raising interest rates for longer than expected.
The U.S. labour market remained resilient around the end of last year, despite increasing evidence of layoffs at individual companies. According to ADP’s survey published on Thursday, private businesses in the U.S. created 235K jobs in December 2022, significantly above market forecasts of 150K, and almost twice November’s level of 127K, which is clearly still too high for the Fed’s liking.
The initial weekly jobless claims decreased by 19K to 204K in the week ending 31st of December 2022, down from the previous week’s revised level of 223K and below forecasts of 225K. This is the lowest reading since September 2022, showing the labour market remains tight and could contribute to further inflationary pressures in the U.S.
The labour market is strong but fragmented, with hiring varying sharply by industry. Businesses that were hiring aggressively in the first half of last year have slowed and, in some cases, started cutting jobs in the last months of 2022.
A strong labour market is usually a sign of economic strength; however, with the current economic backdrop it is seen as a reason for the Federal Reserve to keep rates elevated, hence the good news on the labour front is seen as bad news for the stock market.
The S&P 500 lost more than 44 points on Thursday, as investors digested the economic data and the latest Federal Reserve meeting minutes. Evidence that the job market remains tight, with stronger than expected ADP and JOLTs job openings figures, strengthened expectations that the Fed will stick to its aggressive tightening.
According to minutes from the central bank’s December meeting, which were released on Wednesday, the Fed remains committed to combat inflation and foresee higher interest rates until there is clear evidence that inflation was easing, despite prospects of an economic slowdown.
Federal Reserve officials are of the view that a restrictive policy is needed until incoming data shows that inflation is on sustained path to 2%, which they expect could take some time. Following the minutes, Fed Chair Jerome Powell said that while there has been some progress made in the fight against inflation, he expects interest rates to remain elevated even after all the hiking is done.
Overall, the decline from the January 2022 peak is still in progress and we have continuously evolving evidence that the stock market remains in a fragile state and that the bear market is in full swing. The weekly RSI indicator shows that the momentum conditions remain particularly weak, shedding negative cast on the chart and backing up the fundamental outlook that the market is not out of the woods yet.
We are of the view that a subsequent break below minor support of 3,764 is highly likely, which would confirm the continuation of the decline from the December 2022 high targeting 3,650. Over the medium-term, we still see high probability of a new bear market low to be posted in the next three to six months with potential downside target of 3,400.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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