Investors Are Playing the Fed's Waiting Game

The Weekend Edition is pulled from the daily Stansberry Digest.

They're begging for cuts...

Last Sunday, U.S. Senator Elizabeth Warren urged Federal Reserve Chair Jerome Powell to cut "astronomical" interest rates ahead of the Fed's two-day policy meeting in Washington, D.C. to make housing more affordable for Americans.

I'm sure corporate financial officers who are staring down costly refinancing in the next few months would make the same argument... And so might U.S. Treasury Secretary Janet Yellen as she looks at the skyrocketing cost of government debt.

On Wednesday, at a press conference after the Fed meeting, most of the reporters' questions sounded like they were practically begging for rate cuts on behalf of Wall Street. After all, we're no longer seeing 40-year-high inflation.

But Powell said not yet...

As widely expected, the Fed held its benchmark lending rate steady between a range of 5.25% and 5.5%, where it has been since July. The central bank also said it would keep trimming its balance sheet.

But as is usually the case with these Fed meetings, the market-moving stuff is whatever the Fed chair says about the future. And Powell couldn't have been clearer...

We need more "confidence" about the pace of inflation, he said... and more data that shows the rate is moving toward 2% "sustainably." He referred specifically to the Fed's preferred personal consumption expenditures ("PCE") gauge of inflation and a "12-month target."

Powell also said the Fed probably won't cut rates at its next meeting in March. That particular comment appeared to coincide with a late-day sell-off that ended with the major indexes down a couple percent.

But the Fed is getting close to a "pivot"...

Powell said almost all of the Fed members expect to cut rates in 2024, but that the central bank isn't rushing. The Fed plans to start talking about how to change its balance-sheet policy in March.

Among other things, Powell said...

It's not that we don't have any confidence. We have growing confidence, but... it is a highly consequential decision to start the process of dialing back on restrictions. We want to get that right. We feel like the strong economy, strong labor market, inflation coming down, gives us the ability to do that.

In other words, slow and steady wins the race. The Fed expects to cut rates later this year.

Now, about that jobs market...

On Friday, we got the latest major jobs report – January's "nonfarm payrolls," that is, jobs in the private sector and government agencies. The numbers blew past expectations...

Total nonfarm payrolls came in with 353,000 new jobs added versus forecasts of around 180,000. And the unemployment rate held steady at 3.7%.

This is typically the biggest market-mover out of the monthly jobs reports. The last few reports have been bullish for stocks.

So, the official data from Uncle Sam continues to show a strong labor market. The number of available jobs rose past 9 million in December.

Yet, I can't help but notice the reports of layoffs I've been seeing lately...

One recent story of note was from global shipping giant United Parcel Service (UPS). During its quarterly earnings call, UPS said it plans to cut 12,000 jobs and $1 billion in costs as it deals with a "difficult and disappointing year" amid declining volume, revenue, and profit.

UPS shares fell 8% on that not-so-rosy news. But it may not end there. This company's poor results could point to more widespread problems...

The performance of a company like UPS is often emblematic of the economy in general. That's due to its business of shipping all kinds of things around the U.S. and the world... the number of sectors it touches... and the fact that it has to deal with the realities of the economy like everyone else.

That's why I find this example so telling. Recall that about six months ago, UPS reached an agreement with its employees' labor union to pay drivers $170,000 a year – because, you know, inflation. Now, it's cutting 12,000 jobs because everything is more expensive while demand for UPS's services is down. The company also doesn't expect the trend to turn around until the second half of this year.

So investors... take note.

Belts are also tightening in tech...

According to the free resource – a tool created by a startup founder that tracks tech layoffs when reports are available – 118 tech companies let go of 30,995 employees in January alone.

If that sounds like a lot to you, you're right...

At the current pace (again, this is only the tech industry, but worldwide), that would mean more than 370,000 layoffs by the end of the year. This would surpass the roughly 263,000 tech jobs eliminated in 2023... and 165,000 in 2022.

Looking a little deeper at the data, most of the employees who have lost jobs worked at retail or consumer-facing businesses. For example, online furniture seller Wayfair (W) laid off 1,650 people, or 13% of its workforce, on January 19.

The "magnificent" are not immune...

Microsoft (MSFT), one of the "Magnificent Seven," announced just last week it is letting 1,900 employees go. Microsoft's layoffs are mainly connected to its acquisition of gaming company Activision Blizzard.

Yet fellow tech giant Alphabet (GOOGL) also cut at least 1,000 jobs across multiple divisions last month.

Plus, Alphabet is reportedly shutting down its "moonshot lab" – called X – as part of a broader cost-efficiency push, Bloomberg reported last week.

This division (not to be confused with the social media service formerly known as Twitter) was started by Google founders Larry Page and Sergey Brin in 2010. It was essentially a proving ground for "far-out, sci-fi sounding technologies" – like self-driving cars, self-flying drones, and crop-harvesting robots.

For more than a decade, Alphabet funded these projects using its own resources. Even if it would take losses if the efforts failed, the company believed the possible returns would be worth it. Now, Alphabet is reportedly looking for outside investors to fund these kinds of projects, like any other venture-capital firm might do.

The risk, evidently, isn't worth the reward anymore. The belts are being pulled tighter. Reports of layoffs in other areas of Alphabet have also been coming out of Silicon Valley in dribs and drabs.

And Alphabet might look to do more cost cutting, if this week's market action was any indication...

The company announced its quarterly results on Tuesday night. Earnings beat Wall Street expectations, but apparently not by enough. Alphabet shares are down about 7% since the announcement.

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All the best,

Corey McLaughlin

Editor's note: A lot of investors are still sitting on the sidelines in cash, hesitating over "mixed signals" in the economy. But if that's you, you could be making a big mistake. Our colleague Whitney Tilson recently sat down to explain why... and to share why one "quant" strategy can help you navigate a huge shift he's predicting in 2024. This never-before-seen system gives you access to the kind of information Wall Street pros want to keep for themselves... Get the details here before this story goes offline.