Market Commentary

Weekly commentary providing analysis with an outlook for the equity market.

February 22, 2018

Scott Wren, Senior Global Equity Strategist

The Most Important Piece of Economic Data in March

  • The stock market is hyper-sensitive to any data showing wage gains are accelerating. Sharp wage gains would likely cut into high corporate profit margins.
  • The market will be paying close attention to the March 9 release of the February employment data.

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It may be a week or so before the calendar rolls over to March, but this strategist can tell you right now, with a high degree of confidence, what the most important economic report will be next month. At this point, I might not be able to tell you exactly what that report will say, but I feel certain it has the potential to create another round of stock market volatility.

First, a little background. While it feels like it was longer, the stock market really started to take a dive on February 2, just a touch over two weeks ago. A quick 10% one-week descent was followed by an equally quick bounce back up from the February 9 low. But as of the time of this writing, the S&P 500 is trading less than 5% below its all-time record high set late in January. We realize it doesn’t feel quite like that to many investors. But our Equity Strategy group can sympathize. After all, we are investors as well. This roller coaster of market action stands in sharp contrast to 2017 when the equity market ground higher with nary a whiff of a meaningful pullback all year long. The modest second-half pullback we predicted never materialized.

But if the first two months of this year are any indication, a lack of volatility (aka opportunity) is unlikely to be the complaint coming from market participants over the course of the next 10 months. And based on our positive outlook for the economy and earnings, opportunity is what downside volatility means, in our opinion. We continue to recommend that investors move into the market on the way down when (or if) given the opportunity. We can’t say for sure that investors will be handed another opportunity at the lows seen during the recent pullback, but we do think it is likely the S&P 500 will trade, at least for a period of time, slightly lower than current levels before finishing the year in our 2800-2900 target range. We continue to believe the S&P 500 will offer investors a total return in the 7% to 11% range this year.

Now, back on topic. Recall that on Friday, February 2, the employment report covering the month of January was released at 8:30 a.m. ET. The number of jobs created in January exceeded the average economist’s estimate. But the straw that broke the camel’s back for the stock market, in this strategist’s opinion, was the piece of the report that showed average hourly earnings rose 2.9% over the last year. We thought we would see a year-over-year rise in wages at this rate or a touch higher in the fall of 2017, but it came a few months later than we expected. We thought the market would worry that rising wages would cut into currently high profit margins, spark fears that inflation was going to rise, and compel the Fed to ramp up the pace of interest-rate hikes. We consider those fears legitimate headwinds for the market, as we stated on many previous occasions.

On Friday, March 9, the February employment report will be released. Will downside volatility rear its ugly head again? Or will the wage gains ease and the stock market rally? We will wait and see, but we expect the 12-month change in average hourly earnings will be the most important piece of economic data next month.

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