Charts and Smarts^®

The Joker: While markets look ready to put the conflict in the rearview mirror, let’s not forget that the trends within the economy before the hostilities broke out were hardly robust. While some optimism had been wrung out to start the year, the consensus remains largely overly sanguine on the growth backdrop entering March. And much of that optimism was riding on nascent signs of a stabilization in labor markets being extrapolated into a reacceleration. But shutdowns, strikes, methodological changes, annual revisions and weather have been injecting an enormous amount of noise into the data. Labor markets certainly aren’t collapsing, but beneath the noise, the data doesn’t seem to support the reacceleration narrative.

Winter Time: It’s not just the employment report the pokes holes in the reacceleration narrative, but a broad array of measures of hiring intensity show little signs of perking up. If labor demand isn’t showing signs of firming it’s hard to see how a durable reversal in the cooling trend is underway. And the continued softening in wage growth confirms that. The evidence continues to mount that the economy was already undershooting lofty expectations entering the war.

Take the Money and Run: In many ways it feels like we’re right back to where we were this time last year: facing upside inflation risks from a negative supply shock as the labor market continues to soften. Fortunately, the tension in the Fed’s dual mandate may not be as significant as it appears on the surface. A recent Fed research note estimates that tariffs implemented over the past year have contributed nearly 80 basis points to core PCE. Back out those one-time price adjustments which will roll off over the next year and inflation is within striking distance of the Fed’s target. The energy shock will undoubtedly place some upside pressure on inflation prints in the coming months, but fortunately the underlying inflation trend looks to be more benign than it appears on the surface.

Rock’n Me: One of the more frequently recited explanations for the market’s resilience in the face of yet another early year shock has been that earnings estimates continue to grind higher. While it’s certainly hard to get too bearish with earnings estimates pushing to new highs, the argument is a bit of a red herring in this context. The speed and nature of the shock we’re facing is such that analysts and management teams are unlikely to make meaningful changes to the estimates until the absolutely have to. The result is all of the price action shows up as purely multiple contraction. Ultimately that price action will likely shake out as some combination of multiples and softer earnings growth. But as usual, don’t underestimate Corporate America’s ability to manage through the shock. After all, this isn’t their first rodeo.