There is no reason investors should take on risk in 2023, Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs, told investors in a note this morning, responding to data showing the jobs market is still growing despite the Federal Reserve’s attempts to hit the brakes through seven interest rate hikes last year.
Jobs growth in 2022 remained nearly impossible to slow, with the economy adding far more positions than expected in December, payroll processing firm ADP reported yesterday. In fact, private payroll jobs rose by 235,000 in December, completely outpacing the 153,000 jobs estimated by Dow Jones.
Wilson-Elizondo said the jobs report “will most likely add to the growing narrative of a disinflationary environment crossing with a robust economy and therefore a soft landing,” which could prove positive for stocks in the short-term.
“However, our positioning remains risk-off into 2023. It’s hard to see how risky assets can compete with approximately 5% yields in money market funds until more clarity is delivered on the inflation/growth mix,” Wilson-Elizondo said.
As liquidity continues to drain from the system, the executive said she prefers fixed income over equities.
“It will be a good market for active management and relative value, both regionally and amongst asset classes,” she added.
Goldman-Sachs, however, does not expect the Federal Reserve to let up on future rate hikes.
“We expect the Fed to remain restrictive until there is clear evidence that tightness in the labor market is consistently improving. Critical to the outcome this year for risk assets will be the sequencing of the growth inflation direction. Furthermore, there remains a risk of a “start/stop” response by the Fed, i.e., a pause followed by a hike or a cut as they are data dependent,” she added.
Payroll numbers growth shows the promise of the start of a “goldilocks environment for risk assets,” thereby dampening some of the market’s fears of a recession and an overly aggressive Fed, Wilson-Elizondo said.
But she also warned that today’s data release is “one data point” in a series of many, and the rates market continues to price in an equal probability of a 25 or 50 bps hike for the next Federal Reserve meeting, something several Federal Reserve presidents echoed themselves yesterday.
Kansas City Federal Reserve Bank President Esther George told CNBC yesterday she has raised her forecast for the fed funds rate to above 5% and expects it to stay there for some time as the central bank continues its fight against inflation.
In a blog post, Minneapolis Fed President Neel Kashhari said that the central bank is generally not pleased with the economy and market’s response to the interest rate hikes to date.
The Federal Reserve raised interest rates seven times in 2022, totaling 4.25 percentage points, and officials have identified labor market imbalances as a primary weakness they are targeting.
There are still about 1.7 job openings for every available worker, leading to a 7.3% spike in wages overall, ADP reported. Wages in the leisure and hospitality industry, hard hit by labor shortages, increased 10.1%, the firm said.
"The labor market is strong but fragmented, with hiring varying sharply by industry and establishment size," ADP's chief economist Nela Richardson said in a statement.
"Business segments that hired aggressively in the first half of 2022 have slowed hiring and in some cases cut jobs in the last month of the year,” Richardson added.