Well, it certainly has been an eventful few days of trading action.
Wednesday, equities fell more than 2% as the expected mid-term wave turned out to a be ripple. Still, it appears the eventual outcome of the election will be a divided government. A situation most investors will welcome.
Thursday, we got a lower than projected print from the monthly CPI report. This triggered a massive rally in equities, especially in high beta sectors of the market as the 10-Year Treasury fell back below 3.9%. The Nasdaq was up better than 7% in trading Thursday.
Markets are now factoring in an increased probability of a more modest interest rate hike when the Fed meets for the last time in 2022 in December. Specifically, the market is now looking for a 50bps hike at the December meeting followed by 25bps raises thereafter.
While investors eyes were focused on these two major events, I am noticing a disturbing uptick in the amount of major layoffs being announced. Mark Zuckerberg (META) waited until the day after the election to announce 11,000 Metaverse teammates were getting the axe. Half of the staff at Twitter (TWTR) were handed their walking papers the previous week.
It seems myriad tech firms are drastically reducing their employee count. Intel (INTC) , Spotify Technology (SPOT) , Coinbase Global (COIN) , Snap (SNAP) , Lyft (LYFT) , and numerous other well-known tech names have announced significant staff restructurings in the fourth quarter so far.
The bloodletting is hardly confined to the technology sector. Redfin (RDFN) announced it was implementing a 13% reduction in its workforce as 7% mortgage rates have slammed the housing market as well as refinancing activity.
Banks are also in the process of putting together deep layoffs in their mortgage departments. With mortgage loan volume down some 90% at the likes of Wells Fargo (WFC) , they really have little choice at this point.
Investment banks are also just beginning to trim at the edges of their workforces. That is likely to accelerate in coming months. Again, a massive drop in volume thanks to higher interest rates is to blame. To put in perspective, U.S.-listed companies raised $4.8 billion in proceeds during the first half of 2022 compared to $155 billion in 2021 when the U.S. 10-year Treasury was far below 2%.
The increase pace of firings undermines one of the few pillars of strength in the economy in 2022 - the jobs markets. My take is they are just beginning as the economy adjusts to four 75bps central bank hikes in quick succession. Higher rates always have a lagging impact on economic activity and the jobs market itself is a notable lagging indicator of economic activity as well.
My belief is the Fed has not allowed enough time between each historically high hike to assess the damage they are doing to the economy. My view is we will likely see some negative monthly jobs numbers by the second quarter of next year.
This is the last thing the consumer, who has lost buying power against inflation for 18 straight months now, needs to deal with. Personal savings rates are approaching generational lows. The average interest rate on credit card debt is now over 19%, according to a recent report from Bankrate, the highest level in 30 years. This is as credit card debt is rising at its fastest pace in two decades.
While yesterday's CPI print was welcome news, we are hardly out of the woods yet. Inflation is likely to stay above the Fed's target throughout 2023 at the very least. With a beleaguered consumer and with layoffs picking up at an accelerating pace, all signs point to Stagflation and/or recession in the coming year.
Therefore, I used the largest daily rally in equities since 2020 yesterday, to raise my cash allocation and roll over some covered call positions. We are some time off before being able to sounding 'all clear' and caution remains more than warranted for the near term.