Good news for Main Street was bad news for Wall Street on Friday as average hourly earnings surprised to the upside, Prudential’s Chief Market Strategist Quincy Krosby said Monday in her weekly “Connecting the Dots” outlook. Treasury yields climbed higher, igniting fears that the Federal Reserve would be forced to raise rates at a quicker pace.
To be sure, markets were “overbought” by nearly every measure, and business media headlines were filled with warnings that a sell-off was looming, Krosby said.
“Markets do sell off, and this was one of the most anticipated sell-offs that we’ve had,” Krosby said.
The catalyst for the sell-off came with thunder, with analysts suggesting that if inflationary pressures continue to build, the Federal Reserve may need to raise rates more than the market’s expectation of three hikes for 2018. Uncertainty over how a new Fed chair may proceed in terms of monetary policy is also weighing on the market, she said.
“With wages marching higher, traders and investors are concerned that we could see inflation rising more quickly than anticipated, with need for the Fed to act more aggressively,” she said.
The sell-off may need to continue to reach “oversold” conditions, that level at which sellers who need to sell are finished, leaving the market exhausted, Krosby said. Average sell-offs, or “garden variety” sell-offs before the financial crisis, were typically around 5 to 6 percent.
All of this said, the underpinning for the market remains solid, she said. Earnings and forward guidance are positive. Global economic growth remains strong. Credit markets, while spreads widened slightly last week, remain tight.
“We do not see a recession around the corner,” Krosby said. “Focus on the guidance given by corporate leaders during this earnings season. So far, forward guidance has been positive.”
Buyers will come back into the market but perhaps not as quickly as before when we were conditioned by an extremely accommodative Federal Reserve to “buy on the dip,” she said.
“When buying picks up, which it will, pay attention to the market’s close,” Krosby said. “We will be watching for buying on the close.”
“Healthy markets need to adjust to conditions,” she said, “Certainly they need to move higher, but also lower when they are ‘overbought.’ Healthy markets need to burn off froth and set the stage for the next move higher. Perhaps we are going back to the old normal.”
This week, 92 S&P 500 companies will be reporting earnings, including Bristol-Myers, Disney, General Motors, Archer Daniels Midland, Tesla, AIG, Nvidia, Yum! Brands and Gilead Sciences.
A parade of Federal Reserve speakers this week will be closely monitored for their comments on inflation expectations and policy implications, Krosby said.
This week’s data releases:
- Monday: Services PMI; ISM non-manufacturing; Jerome Powell is sworn in as the new chair of the Federal Reserve
- Tuesday: Job openings and labor turnover report
Read Quincy Krosby’s full Q1 Market Commentary: Turning the Page.
The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.