Fed Policy…in Plain English

My daughter home schools her twin sons, age seven. When I’m visiting, I’m usually tasked with teaching the kids, while their harried mom catches up on her sleep.

During my Thanksgiving visit this year, I brought teaching guides with me: Federal Reserve comic books. The New York Fed’s Educational Comic Book Series teaches students about the Fed’s role in the economic system. The comic books are designed for various levels, from grammar school all the way up to college:

My grandkids showed admirable patience in reading these comic books. How much they actually absorbed is doubtful. But even the adult pros on Wall Street could benefit from a refresher course on the Fed. Albert Einstein once said: “If you can’t explain it to a six year old, you don’t understand it yourself.”

Economic deceleration, the cooling labor market, and declining inflation signal the likely conclusion of Federal Reserve tightening. This much is clear.

But it begs the question: Are the markets excessively optimistic about rates cuts occurring in early 2024? Some analysts are starting to warn that the markets are too sanguine about the prospects for a near-term Fed pivot. They argue that investors are setting themselves up for disappointment.

Regardless, the good news is that we’ve reached peak rates and tightening is behind us. Against the backdrop of slowing global economic growth, long-term Treasury yields have declined, propelled by the reduction in job openings.

According to the Labor Department’s Job Opening and Labor Turnover Survey (JOLTS) report for October, released on Tuesday, there were 1.34 vacancies for every unemployed person. That level represented the lowest number of vacancies since August 2021. It’s also considerably lower than the 1.47 vacancies reported for September.

JOLTS indicates the number of job openings each month, how many workers were hired, how many quit their job, how many were laid off, and how many experienced other employment separations (which includes worker deaths). JOLTS is important because it helps estimate the demand for labor.

Job openings at the end of October fell to their lowest level since March 2021 (see chart).

Openings declined by 617,000 to 8.73 million. In September, the number had been 9.35 million. The consensus of analysts had expected 9.30 million job openings for October.

We’re on track to achieve equilibrium between labor supply and demand in the coming year. Investors await Friday’s payrolls report, with expectations of a potential boost from the resolution of the UAW autoworker strikes.

Simultaneously, oil prices have been falling, despite recently announced OPEC+ supply cuts. Traders are expecting less energy demand as the global economy slows.

The performance of European markets has been mixed, while Asian markets have slumped. Moody’s decision Tuesday to revise its outlook for Chinese bonds to “negative” underscored prevailing concerns regarding the nation’s burgeoning debt and property market downturn.

The main U.S. stock market indices took a breather on Wednesday and closed lower as follows:

  • DJIA: -0.19%
  • S&P 500: -0.39%
  • NASDAQ: -0.58%
  • Russell 2000: -0.21%

Amid the conditions I’ve just described, the winners of 2023 are poised to become the laggards of 2024 (and vice versa). The stock rally has been dominated by “The Magnificent Seven,” comprising Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Meta Platforms (NSDQ: META), Microsoft (NSDQ: MSFT), Nvidia (NSDQ: NVDA), and Tesla (NSDQ: TSLA).

However, in recent weeks, the dynamic has changed. The Magnificent Seven have trailed the broader market by 4% since November 28, while small-cap stocks have exhibited outperformance. This shift prompts consideration of the opportunities emerging in segments of the market that have underperformed.

Potential beneficiaries include bond proxies, particularly within traditional defensive sectors, if the economy enters a soft patch early in 2024.

WATCH THIS VIDEO: How to Beat The Investment Crowd in 2024

As you position your portfolio for next year, turn to utilities stocks. The utilities sector has gotten clobbered lately by rising interest rates, but it’s poised to rebound as bond yields continue their descent. That means value plays are ready for the picking.

Super investor Peter Lynch once said: “Never invest in any idea you can’t illustrate with a crayon.” Few concepts are as easy to grasp as utilities. They provide essential services, in good times or bad. For our list of the highest-quality utilities stocks, click here now.

John Persinos is the editorial director of Investing Daily.

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