Fed Pivot: 3 Charts Prove Why Now Is The Time to Buy Stocks

We’re in the midst of a nasty bear market. But every bear market in history has become a new bull market. So, prescient investors know that at some point, today’s market will create a golden buying opportunity.

That time is now. 

Everything’s about the Fed these days. The so-called “masters of the financial universe” are hiking interest rates rapidly and aggressively to stymie inflation. Unfortunately, it’s also curtailing economic activity and leading to significantly lower stock prices. 

The good news is that since stocks are so beaten-up, with depressed-enough valuations, when the Fed decides to stop hiking interest rates, they will soar. The bad news is that no one really knows when the Fed will stop hiking interest rates.  

On Friday, though, we may have received some very important clues from the October jobs report. And they indicate that a Fed pivot (read our thoughts on what a “pivot” means) is very close and that the time to buy stocks is right now. 

“Unhealthy” Job Growth

At first glance, Friday’s jobs report was scalding hot. The U.S. economy added 261,000 jobs in October, much better than the 193,000 expected by economists. 

The big jobs number is deceiving, however, because it was “unhealthy” jobs growth. That is, 60% of the job growth came from the lower-paying services sectors. 

That’s worrisome. 

Lower-paying services include things like retail, travel, and entertainment. Those are the last dominos to fall in an economic slowdown. That’s mostly because those are consumer-driven industries, and consumers tend to be the last to react to a slowdown. That is, businesses usually recognize an economic slowdown before it happens and pull back spending and hiring before it arrives. Consumers, on the other hand, tend to recognize a slowdown only when it happens and pull back their spending only once it hits. 

So, if we’re seeing outsized growth in consumer-driven industries and small growth or losses in business-driven industries, that’s a “tell” that we’re heading into a major slowdown. 

Indeed, whenever the lower-paying services sector – which normally contributes about 40% of job growth every month – starts to consistently account for more than 60% of monthly job growth, the labor market starts to lose jobs shortly thereafter. 

In early 2007, the lower-paying services sector had a string of months where it accounted for more than 60% of jobs. By mid-2007, the once-strong labor market was shedding jobs. 

And in mid-2000, the lower-paying services sector had a string of months where it accounted for more than 60% of jobs. By early 2001, the once-strong labor market was shedding jobs. 

In other words, the fact that the bulk of hiring today is coming from the lower-paying services sector indicates that the labor market is on its last legs before a collapse. 

But you don’t need the data to tell you that – just look at all the recent jobs headlines. 

Amazon (AMZN) and Apple (AAPL) have both paused hiring. Twitter (TWTR) is reducing its workforce by 50%, while Stripe and Lyft (LYFT) lay off 14% and 13% of their workforces, respectively. And for its part, Coca-Cola (KO) is offering voluntary buyouts. 

The layoffs are piling up. The labor market is about to crash. 

For stocks, that’s bullish.  High interest rates hurt growth stocks. But historically speaking, the Fed has backed down from aggressive monetary policy when Americans are losing jobs. 

Therefore, if Americans lose jobs in droves over the next few months, the Fed will pivot dovish. And stocks will rally

Unemployment Will Encourage a Fed Pivot

Another interesting facet of Friday’s jobs report was that the unemployment rate ticked up 20 basis points to 3.7%. 

While that may seem like nothing, we think it is very important. 

Please understand: When the unemployment rate rises, it doesn’t rise gradually – it spikes. Specifically, during recessionary periods, the unemployment rate gains 20 basis points every month. 

We rose by 20 basis points last month. Given all the layoff announcements, it seems likely we will see 20 bps increases per month for the near future. At that pace, unemployment will exceed 4.4% by February 2023. 

That’s significant because the Fed has signaled that 4.4% unemployment is a possibility in 2023. Therefore, the Fed has the greenlight to hike rates until unemployment hits 4.4%.

But if joblessness exceeds that level, the pressure will be on the Fed to stop hiking rates. 

Our analysis suggests it could exceed 4.4% by February 2023. That means that within three to four months, the Fed will need to seriously consider ending its rate-hike campaign. 

A graph showing the change in unemployment over time

If the Fed’s last rate hike is in February 2023, then stocks will absolutely soar throughout the rest of 2023. And so, the time to buy stocks before that big rally is right now.

Wage Growth Is Collapsing

One of the stickiest parts of inflation is wage inflation. That’s partly why the Fed has been so aggressive with rate hikes. Wage inflation has been running above-trend ever since the pandemic emerged, and the Fed has wanted to snuff that out. 

But wage growth is now falling quite rapidly and is on track to hit its pre-pandemic levels within a few months. 

Specifically, average hourly earnings rose 4.7% year-over-year in October, down from 5% growth in the prior month. Assuming this 30 basis points per month of decelerating growth persists, then wage growth will fall back to 3% by April 2023. 

Wage growth averaged about 3% in the years before the pandemic. Therefore, we have visibility to wage growth normalizing to pre-pandemic levels within the next six months. 

There simply is no reason for the Fed to hike rates at that point. 

A graph showing the change in wage growth over time

If, indeed, we see a Fed pivot by early 2023, then stocks are due for a massive rally between late 2022 and late 2023. 

The Final Word on the Coming Fed Pivot

The bear market of 2022 has been brutal. But the one thing about bear markets is that they always turn into bull markets. 

This one looks like it could turn into a bull market very soon. 

The Fed is playing the “tough guy” right now. But it’s just an act. As soon as the labor market falls apart and wage growth collapses, it will have to ditch that act. The data says that’s going to happen very soon – by early 2023. And therefore, a Fed pivot is on the way within the next three to six months. 

Stocks tend to sniff things out before they happen. That’s why stocks aren’t crashing right now and why they haven’t made new lows even after the Fed’s super-hawkish press conference this week. The market knows that what the Fed does is more important than what it says – and that it will pivot by early 2023. 

Mark my words: Next year will be a record-breaking year for stocks. 

Find out how to best play this coming massive rally.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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