With a Strong Labor Market, Is a Recession Really Coming?

The U.S. unemployment rate has fallen to 3.5%, approaching a historic low, and job creation has turned out to be stronger than expected.

Accordingly, the recession scenario that had dominated the market is seen as easing to some extent on the back of these solid employment figures.

In short, looking at the labor data alone, the U.S. economy appears to be quite resilient.

If the U.S. economy is this robust, the Federal Reserve has little reason to cut its policy rate, given the risk that inflation could flare up again.

The four major indices drifted slightly lower to flat for most of the week, then surged on Friday to finish strongly.

The Russell 2000 led the way with a gain of 1.82%, followed by the Dow Jones Industrial Average (+1.49%), the S&P 500 (+1.46%), and the Nasdaq Composite (+0.95%).

The Nasdaq has been underperforming recently, likely tied to weakness in major tech names such as Tesla (TSLA) and Microsoft (MSFT).

All sectors finished the week higher except healthcare, which slipped 0.13%.

Communication services, which was the worst-performing sector in 2022 with a 38.2% decline, led the market higher with a 5.02% gain, while materials (+3.46%) and financials (+3.45%) were also strong.

Financials have stood out in particular, as a recession that proves milder than feared would mean loan-loss-driven margin compression may not be as bad as the market had worried.

Alongside healthcare, the relatively weaker sectors were energy (+0.10%) and information technology (+0.23%), showing a classic pattern of oversold names bouncing.

However, a rebound in oversold stocks is not necessarily an unambiguously positive signal for the market.

It can also mean that market participants are gravitating toward what looks cheap. Investors tend to buy cheap stocks when they lack conviction about growth.

Tesla (TSLA), which everyone is watching closely, ended the week down 8.22% year-to-date, though it has recovered somewhat from its recent lows.

What is interesting is that analysts have recently started to focus on Tesla’s demand problem.

At AWARE, we have been cautioning for several months against investing in automakers because of demand concerns, and now Tesla is increasingly being treated like a traditional car company.

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