 Tom Graff, Head of Investments, Facet Wealth joins Cheddar News. 

Wake Up With Cheddar

Markets React to Nov. Jobs Report 

joining us now to discuss all this is tom graff head of investments at Facet wealth. Tom thanks so much for joining us this morning. What's your outlook on the markets today and for the rest of the trading week. Well thanks for having me. Um Yeah as you said, it was a tough day. Yesterday markets are still struggling with this idea that the Fed is going to slow its pace of rate hikes but maybe they're gonna go to an even higher ultimate rate and what does that mean for valuation, What does that mean for recession risk? And kind of as we get good data like the sm yesterday or the payroll report on friday, it's got this added worry that oh well maybe that will mean something worse down the road from the Fed. So we're going to have this tug and this sort of pole between what data is actually good and what data is actually helpful for stock valuations. Alright. Tom the Fed is going to watch november jobs report as well. You've said that you're not so sure the consumer income is growing at the pace that this wage figure actually suggests. Why is that? Yeah. So on friday and then really this influenced market yesterday too, I think um Mark directed pretty badly to the wage figure. The job growth number was fine. It was it was good not but but still well within a normal range and probably not to worry the Fed, but wages came in much higher than expected. Um And and wage growth can translate into inflation right? So consumers in order to bid up prices have to have the income to bid up prices of wage growth comes in too fast. And that worries the Fed paolo said so himself on several occasions. But that's kind of an odd figure if you take it in the totality of what else we've heard from the labor market, we know that job openings are down about 10% from their highs. We know that the piece of job of hiring has slowed by about half from what it was in the first half of the year. We've heard many companies either talking about layoffs or talk about slowing their own piece of hiking or hiring during this last um earning season. Then finally even from this one report, if you look at weekly wages and not average hourly wages, the increase was actually the slowest, It's been several months. So I think that average hourly earnings number might have some noise to it. And I think the totality of the labor market is telling us that things are slowing a bit tom. I'm glad you mentioned you know hiring freezes and layoffs here because yesterday's ceo economic outlook index did show that optimism is fading among top executives. It's the first time since 2020 that the index has fallen below its long run average. So what's your reaction to that report? And what does it say about the economy here? Well I think C. E. O. S. See what's in front of them right? Like they see that the Fed is continuing to hike right and the purpose of that is to slow the economy, they are seeing that demand for their products is slowing. If you look across especially goods purchases at the consumer level um That is slowed down substantially. Uh And then if you look at globally with most U. S. Companies operate globally um you're seeing significant slowdowns when you mentioned china during the break but also europe looks pretty tough. So there's there's there's a lot of reasons why Ceos would be a little bit worried and it just feeds into my view that it's unlikely the labor market is getting tighter. It's more likely that it's softening. Maybe they're at the stages of softening but it's probably softening. The markets are largely expecting the central bank will approve a half a percentage point interest rate hike. But you mentioned earlier perhaps a higher you know terminal rate here, are you anticipating this as well and you know what could that terminal rate end up looking like based on the data that we've been getting out? Well certainly possible. Okay. Um I think if inflation does not slow or is frustratingly slow and its pace of slowing um then the Feds gonna do whatever it takes to bring inflation down. That's their job. That's what they're committed to and I fully expect that they'll follow through on that regardless of other consequences but if you think of inflation as an imbalance between spending and the economy's ability Supply and you start to see inflation come down and that probably means that imbalance is improved and in my view it's likely that's going to keep going. So um I actually think while the Fed is right to to warn markets that maybe the terminal rate could wind up being higher than currently expected, you know right now markets are pricing in about 5%. I think that's probably right. I think by the time we get to the Fed's March and or may meeting, we've had several of these slower inflation prints and the Feds gonna have increasing confidence that labor market looks like it's slowing spending looks like it's slowing inflation starting to come down. This is all coming together. We can pause um and see how that plays out. So I still think a pause in the spring of next year is the most likely outcome. All right. Tom and lisa In light of the recent market rally not yesterday, of course. What sectors are you watching? How are you advising clients? But I still think you want to be um cautious about companies that are especially vulnerable to either a recession or interest rates staying high. So, I think if there winds up being a soft landing right where we either don't get a recession or the very mild one, then the Fed doesn't wind up cutting much interest rates stay pretty high. Um There's a lot of companies that are still kind of vulnerable to that, we know very, Very lower probability, very fast-growing companies that still have pretty high valuations have been one of the worst performers in 2022 and that's because of interest rates. So you want to watch out for those, but you also want to watch out for companies with high debt loads because as they need to roll over those debts and they roll them over to ever higher interest rates. That's more money flowing to bondholders and less money flowing stockholders. So we're looking at underweighting those kinds of companies. I think if there is a recession risk, you want to overweight companies with less debt because they have more financial flexibility, but also higher profit margins because they tend to have something to cushion them against us slowdown in their general revenues. So that's what we're looking at right now. All right, tom thank you so much for joining us this morning. That's tom graff head of investments at fast as well.