The US stock market could be in a precarious position due to robust job numbers and wage growth, which suggest that the Federal Reserve’s interest rate hikes may not be having the desired impact, warns Cole Smead, CEO of Smead Capital Management.
What Happened: As CNBC reported on Monday, Smead, known for accurately predicting the resilience of the U.S. consumer despite the tighter monetary policy, has stated that the real risk has been the economy’s strength despite 500 basis points of interest rate hikes.
January saw nonfarm payrolls grow by 353,000, significantly exceeding a Dow Jones estimate of 185,000. Average hourly earnings also rose 0.6% on a monthly basis, double the consensus forecasts. Unemployment remained steady at a historically low 3.7%.
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Smead argued that the Consumer Price Index (CPI) fall should be attributed to “good luck” due to falling energy prices and other factors beyond the central bank’s control rather than the Fed’s aggressive monetary policy tightening.
"The better question might be why is the stock market priced like it is with the economic strength and the Fed being pigeonholed into having to keep these rates high? That's a very dangerous thing for stocks," Smead warned.
The warning from Smead comes in the wake of a dip in U.S. stock futures on Monday, as investors brace for an earnings-heavy week and Powell maintains a hawkish tone on potential rate cuts. Despite this, the market found support from some positive earnings reports, cushioning the downside.
On Sunday, Powell hinted at the possibility of interest rate cuts in 2024, citing a strong economy and decreasing inflation. However, he emphasized the need for more positive economic data before deciding on interest rates.
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