A Cushion Against Potential Economic Turbulence

Jeremy Siegel

June 12, 2024

Jeremy J. Siegel, WisdomTree’s Senior Investment Strategy Advisor, is the Russell E. Palmer Professor Emeritus of Finance at The Wharton School of the University of Pennsylvania. Professor Siegel has written and lectured extensively about the economy and financial markets and is a regular contributor to the financial news media. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by BusinessWeek magazine. His book, Stocks for the Long Run, was named by The Washington Post as one of the 10 best investment books of all time. His latest book, The Future for Investors, is a bestseller.

There was a significant reaction in the bond market to the latest job growth figures, which exceeded expectations. The positive surprise led to a sharp 10 basis point rise in long bond yields. Interestingly, equity markets remained resilient in the face of this increase, suggesting a collective market relief that we are not heading toward a slowdown or recession. This resilience underscores the ongoing strength in corporate earnings, providing a cushion against potential economic turbulence.

While the payroll numbers were robust, showing a strong addition of jobs, the unemployment rate ticked up to 4% for the first time in three years. This increase might capture headlines, but it’s essential to delve deeper. The household survey, which showed job losses, contrasts with the firm establishment data, which is generally more reliable due to its larger sample size and scope. For background, the establishment surveys approximately 119,000 businesses and government agencies, representing approximately 629,000 individual worksites. There have historically been 60,000 households surveyed for the unemployment rate, but a news item broke on Friday suggesting higher costs of surveys and budgetary constraints at the BLS would be reducing the number of households surveyed to 55,000. We might expect more noise in these two jobs surveys ahead. Nevertheless, job losses were concentrated among younger age groups, with stable employment levels in middle and older age groups.

One datapoint that weighed on the market: wage increases came in above expectations, stoking concerns about inflationary pressures. However, it’s crucial to recognize that productivity is a wedge between wage gains and inflation. Although productivity gains were modest in the first quarter, there is potential for improvement which could offset some of the inflationary effects of wage increases.

Looking ahead, all focus will be on the CPI report and the Fed’s commentary this week, which will be critical in shaping market expectations and monetary policy direction.

We’ve seen a meaningful pullback in commodity prices, including a notable decrease in oil prices, which should positively influence future inflation readings. Lower commodity prices, coupled with potential adjustments in rental index calculations, could lead to more favorable inflation data in the coming months. This improvement would be a positive development for the markets and should influence the Federal Reserve’s rate decisions. Nevertheless, at this week’s meetings I expect the dot plot to show between 1 and 2 cuts, with a few FOMC members choosing no cuts.

The global political landscape, including recent elections in Mexico and India, along with rate cuts by the European Central Bank and the Bank of Canada, were notable events last week. International markets remain at discounts to the U.S and there was elevated volatility around the two emerging market elections, even though there were no real major surprises in either of the outcomes last week. Our team looks quite favorably at the long-term prospects for India – its population and demographics provide a strong backdrop over the coming years and even decades. Modi and India have embraced a pro-business and economic agenda which revitalized capital market flows and interests at a time most stay focused on the U.S. markets. I encourage investors to think globally over the long run.

Past performance is not indicative of future results. You cannot invest in an index.

Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

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