The stock market is seized by "extreme greed." Will Friday's weak jobs data end up vindicating Warren Buffett?
Every investor knows Warren Buffett’s stock market mantra by heart: “Be fearful when others are greedy and greedy when others are fearful.”
So when blindsided by weak economic data while a gauge of stock market sentiment suggests that others are extremely greedy, you’d think some investors would be at least a smidgen fearful.
But with stocks trading near all-time highs, that doesn’t seem to be the case.
Judging by CNN’s famous Fear & Greed Index, Wall Street is being overwhelmingly driven by avarice.
The tool, which tracks seven indicators tied to risk appetite, surged as high as 97 last week on a scale of 0 (extreme fear) to 100 (extreme greed) where 50 represents neutral sentiment.
Granted, the sudden spike in US-Iran hostilities may have made investors a tad more cognizant of looming downside risks. That explains why the gauge “plunged” all the way to its current reading – 92.
Historical data suggest the US-Iran hostilities were never going to puncture the stock market over the long-term, (though it was notable how muted the response was even before tensions crossed an inflection point).
Maybe investors are just placing more emphasis on the economy.
In that case, an unexpectedly weak December jobs report would surely cause them to pause and reconsider what overextended valuations anticipate about corporate earnings growth.
By some measures, the stock market is already at its most expensive level in history. And you won’t find any measure that makes it look cheap.
With stock prices trading so far above earnings, corporate profits must rise dramatically to bring multiples back down to historical levels. But it’s not clear public companies can deliver on those expectations, and Friday’s jobs report may give a clue about why.
According to the Labor Department, US employment rose by 145,000 jobs in December. That was 15,000 jobs below economist estimates, and the gains were primarily in low-paying fields like retail. That explains why wage growth was also softer than anticipated.
Charlie Ripley, senior investment strategist for Allianz Investment Management, says Friday’s employment report underscores the thesis that the US economy’s longest-ever expansion will continue for at least one more year.
While disappointing on the headline, today’s payroll miss is unlikely to change the outlook for the U.S. economy as the results are consistent with economic output chugging along at trend pace…
Overall, today’s report is a precursor to what we can expect in 2020, an economy extending the current expansion at a moderate pace.
Not everyone is quite so optimistic.
James Knightley, chief international economist at ING, warns that this flagging wage growth will dampen consumer spending in future quarters. He expects weak consumer data to contribute to lackluster GDP in 2020.
The clear disappointment is wages. Despite all the talk of a tight jobs market and companies struggling for staff with the right skill sets there is little evidence of labour costs being bid higher.
With employment gains likely to slow further in 2020, weaker real wages underline our view that softer consumer spending growth is going to be a key factor that leads to GDP disappointing in 2020.
With a greedy stock market already pricing in a “reacceleration,” it’s not clear if this “moderate” economic growth will be enough to vindicate overextended multiples.
But it might be enough to vindicate Warren Buffett.