Stocks finished strong after a surprising jobs report. The U.S. economy added 528,000 jobs in July, the Labor Department reported, more than twice as high as expected, and the unemployment rate ticked down to 3.5%, matching the lowest level since the late 1960s. Wage growth also rose more than expected, up 0.5% for the month and 5.2% higher than a year ago, signaling that high inflation remains a problem. It is now almost a given that the Federal Reserve would continue its aggressive interest rate hikes to cool the economy and dampen inflation. While Biden took a victory lap for the impressive jobs number, China began its retaliation to Nancy Pelosi’s visit to Taiwan, putting further pressure on the supply chain of goods and the prospect of an increase in cyberattacks on US corporations.

The good news is that Wall Street appears to be ignoring the Fed’s position because it is not forward looking anymore and its opinion on the market is largely unreliable.

Future Wealth’s View

For investors, the jobs report signals that a recession has likely been averted. While the technical definition of a recession has been two quarters of negative GDP growth, there has never been a recession with strong jobs growth. Which puts this current period alongside the past few years of unprecedented events that has skewed conventional wisdom and norms.

The Fed’s challenge, besides gaining back its credibility, is to find the correct jobless rate that tames inflation. There is no way for the Fed to get inflation down to 2% without cooling the economy and reducing wage growth. If the economy remains hot and unemployment remains stubbornly low, the Fed would have to keep hiking interest rates by 50 to 75 bps in every meeting through December.

The good news is that the first six months of 2022 on Wall Street has purged the foolish investments – meme stocks, crypto, house flipping and other nonsensical moves that do not qualify as investments to begin with. Now, we are at a moment where wisdom and hard work can pay off in spades over the next 12-18 months. Despite what the Fed does in the coming months, Wall Street is looking ahead to 2023 and fundamentals will begin to reign once again. There are a plethora of stocks of solid companies that are now trading at 1x book value, less than 10x P/E etc. 

There is a lesson in all of this for us. Take the test and pass it.