If you have been following Market Musings, you will be aware that my view of the market shifted a couple of weeks ago. Until that point, I had been pretty consistently bearish, but a pattern emerged during earnings that made me believe that things might not turn out anywhere near as bad as the market was indicating. Over the last few days, there has been further evidence that a “soft landing” for the U.S. economy, which looked extremely unlikely a few weeks ago, now looks distinctly possible.
It might just be that, if they don’t mess it up, the Fed will be able to claim credit for guiding the economy to a fairytale ending, where the evil of inflation is vanquished without falling into a recession, and we all live happily ever after.
What I observed two weeks ago that first made me think that was possible was a bifurcation in the economy. Businesses that served businesses, particularly on the tech side of things, were reporting dire things and cutting back, whereas businesses who served consumers were holding up well, and even being optimistic in many cases. Over the last twenty-four hours, yet more evidence to support that “two economies” view has emerged.
The trend of two separate and distinct earnings environments has continued, and the split cannot be better demonstrated than by looking at two Q3 reports that came out since yesterday’s close; those for Atlassian (TEAM) and Starbucks (SBUX). Atlassian is an enterprise software company, putting them firmly in the business-to-business category, whereas Starbucks, as we all know, sells to you and me, ordinary consumers.
The market reaction in each case tells you what you need to know. TEAM is trading down 23% in the pre-market as I write, whereas SBUX is up nearly 7%. Businesses are cutting back, particularly on tech; whereas consumers are proving resilient, still buying despite price increases and all the doom and gloom from tech companies.
The reason for that resilience became clearer this morning too, when the Bureau of Labor Statistics released an October jobs report that was right in the Goldilocks zone: not too hot and not too cold, and that should be a warning for not just three bears, but all of them. The U.S. economy added 261,000 jobs, more than economists had expected. The unemployment rate was marginally higher than forecast, at 3.7% versus 3.6%, and hourly wages rose by 4.7% year over year, exactly as expected.
All in all, that paints a picture of a still-strong jobs market, where wages are rising, but by less than inflation, and unemployment is low and quite steady. No wonder consumers are not averse to paying fifty cents more for a latte or a dollar more for a burger at MacDonalds (MCD). Their buying power may be a bit lower than it was a year ago, but they still feel they can afford things and are confident that their job is safe.
Increasingly, it is looking like the problem in tech is just that: a problem in tech. Of course, if the job losses start to measure in the hundreds of thousands and impact the overall jobs market, there will be a spillover effect but, so far, that hasn’t happened. A hiring freeze here and there and a few cuts seem to be more about an adjustment of a prior profligacy than anything, and the rest of the economy is absorbing them in its stride.
I am still not completely convinced that we are ultimately headed to a happy ending. If the Fed, as they indicated might be the case this week, suddenly becomes concerned with creating an image of strength, courage, and consistency and heads to a targeted “terminal rate” regardless of the impact of what they have done so far, there is the potential for real trouble ahead. However, the time lag that always follows policy shifts means that it won’t be a problem for another three to six months and, in the meantime, we have what increasingly looks like a problem contained to one specific area of the economy and a Goldilocks jobs report.
Maybe we will live happily ever after, after all.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.