Friday Showed Lift-Off

Macro Perspectives: Mon 06 Dec 21

We talked about the prospects of getting a hot jobs report.

We talked about the risk it would represent to "high multiple" stocks (namely, high-growth tech stocks).

The unemployment rate came in at 4.2% (a big drop) - along with a big drop in the underemployment rate.

The jobs report was indeed hot - that's despite a softer payroll number, which will likely be revised higher (as the past four have), and is trending at more than double pre-pandemic levels.

Remember, the Fed has given us a condition for rate hikes - it's "maximum employment." This level of employment the Fed calls "maximum" (or full) hasn't been quantified, but if we go back through 70 years of history, there are only five periods in the U.S. economy where the unemployment has been lower.

It's a pretty good bet that the Fed has met its objective on employment, we already know they have exceeded their objective on prices (price stability). So, this report should seal the deal for a faster path to Fed rate hikes.

With that, the very high multiple, high growth tech stocks did indeed get punished on Friday. Why? Higher rates tend to bring about lower valuations. When Wall Street analysts start plugging in a higher discount rate (interest rate) into their cash flow models, they will get a lower price target (in some cases, much lower).

This, as the Nasdaq closed Friday at 36 times trailing-twelve month earnings and 30 times forward earnings. The average P/E on the Nasdaq over the past 14 years is 20.