Stableford Capital Insights

Stableford Market Commentary February 2023

Payroll Proves Pernicious to Powell Pivot

After beginning the year on a strong note equity and bond prices fell during February as strong economic data quashed hopes of a rapid Fed pivot. Ten-year U.S. Treasury yields leapt 42 basis points to 3.92% in February following a strong January payroll report of 517,000 additions, far above the highest economist estimate.[caption id="attachment_4034" align="aligncenter" width="940"]

Graph showing Rates increasing during Feb 2023

Exhibit 1—Rates Up to 3.9% on Strong Economic Figures[/caption]Additional robust economic reports during the month including the ISM Services index and CPI kept interest rates moving toward the important 4% level that traders doubted they’d see again so soon.The prospect of sticky inflation and higher interest rates also pushed equities down nearly 2.7% in February as the prospect of a Fed pivot that drove the January rally was quashed.[caption id="attachment_4035" align="aligncenter" width="940"]

Graph showing equities falling in February 2023

Exhibit 2—Equities Fall on Fears of Overheating[/caption]Equities continue to bounce between the prospect of a stronger-than-expected economy and the risk of the Fed needing to push rates higher. So far 2023 economic readings and surveys had proven vigorous. But the Fed desires a slowdown to core PCE inflation and labor, which thus far is elusive.

Stableford’s View

While equities and bonds have fallen on stronger than expected economic news, there is reason to doubt the veracity of the economic figures. No doubt, the economy is stronger than the Fed wants, but the January payroll figures that induced the move in February were altered by the largest seasonal adjustment of the year, approximately 3 million jobs (BLS adjusts monthly statistics to account for seasonality—but introduces further errors by doing so). Ex this adjustment, the January figure would have been -2.5 million, not +517,000. The upcoming February figures may also prove strong as the weather has been unusually warm, but the seasonal adjustment figures are substantially lower. So, we may not get a “clean” look at the jobs situation for a while.In the meantime, the key discounting mechanism for earnings—interest rates—continue to move higher. Earnings multiples remain high as well, and there is still risk to future earnings coming down, though this has been reduced by the recent economic strength. As always, we work to balance between the prospects for portfolio appreciation and the downside risks from the macro data.

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July 8, 2024
Posted in
by Stableford Capital
Justin Thomas
Justin C. Thomas has worked for over 15 years as a portfolio manager and analyst managing institutional assets for hedge funds and large financial institutions. Career highlights include 8 years as an equity analyst and portfolio manager at PartnerRe Asset Management, a global reinsurance company with $17 billion in assets under management, and prior to that managing a long-short equity portfolio for Citigroup’s proprietary account. Justin has also worked as an analyst at long-short hedge funds and in research for Montgomery Securities (Bank of America Securities). In addition, Justin Thomas gained operational experience while working in finance and operations at E-Stamp, a start-up in Silicon Valley. He began his career working as a CPA at KPMG. Justin has an MBA and Masters in Accounting from Northeastern University and an undergraduate degree in Economics from Tufts University.