What Is Priced In?

March 24th Weekly Market Update

 The S&P 500 seems to have absorbed the prospect for rate hikes by the Federal Reserve (Fed) beginning as soon as the middle of next year reasonably well. While stocks slid on Friday, March 21, early in the day they hit a new all-time intraday high a day after Fed Chair Yellen indicated a potential time frame for the Fed to begin rate hikes after ending their bond-buying program.

Since stocks seemed to have a relatively mild reaction to the Fed news last week, it begs the question: what is priced into the markets about future economic growth and inflation?

The labor market is a lagging indicator of economic health. It tends to peak and trough after a turn in the broad economy. Therefore, stocks tend to react ahead of changes in the job market. In fact, stocks tend to lead future job growth by about six months, as you can see in Figure 1. The S&P 500 Index is up over 20% from a year ago. Given the historical relationship between stocks and jobs, this suggests about a 2% year-over-year growth rate for net new jobs or a pace of about 230,000 per month. This would mark a pickup from the 186,000 average of the past three years and a big jump from the 129,000 three-month average.

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