The market wants you to lose your job
There was a lot of economic data released this week; however, mixed readings cloud the macro outlook. On the negative side, ISM, which measures manufacturers' purchasing activity, slipped into contractionary territory. Consumer confidence declined to a 4-month low. The number of job openings declined, and PCE, which measures inflation, continued to decline. Contrary to this, real gross domestic product (GDP) for Q3 was revised higher to 2.9% on an annualized basis, and Q4 is tracking positively as well, according to the Atlanta Fed. To cap off the week, we got a strong jobs number, showing the labor market continues to be strong, and wage inflation is intact. Out of all this data, the jobs number at the end of the week is probably the most important to focus on. As we have discussed in the past, the Federal Reserve has been raising interest rates in order to slow the economy. Their mandate is twofold, price stability i.e. inflation, and employment. A strong jobs market gives them the ability to continue to hike. The market has been very focused on the ultimate level of interest rates and has sold off when expectations for higher rates rose. So we are in a perverse position where the market wants more people to lose their jobs.
Pandemic excess savings being drawn
On a related note, the resiliency of the consumer has been one of the reasons for the recent strength in the economy. During the pandemic, the personal savings rate exploded as spending was curtailed early and stimulus followed. Although a lot of those excess savings are still there, the personal savings rate has plummeted back to levels not seen since 2005. This likely means consumers are starting to draw down from their excess savings.
Weakness in enterprise software
A major theme in this week’s earnings reports was the notable weakness in enterprise software. Major companies across the enterprise software landscape reported weak numbers, including Salesforce, CrowdStrike, Asana, Veeva Systems, and Zscaler. In an uncertain time, many large companies are holding off on major enterprise software deals. Companies are also reporting longer sales cycles. Slowing growth does not fly in a higher-rate environment where valuation and cash flow are critical. High-growth SaaS companies were the darlings of the last bull market. While they are also down significantly since they peaked in late 2021, many still trade at a multiple of revenue. However, given the market reaction this week, there may be more downside.
