Vanguard S&P 500 ETF: Fed Minutes, Manufacturing PMI And Jobs

Investment Thesis

This week is important for the Vanguard S&P 500 ETF (NYSEARCA:VOO) as investors turn their eyes to Q4 2022 earnings for clues on the state of the economy going into 2023. According to the Wall Street Journal, two-thirds of the US banks now predict a recession in 2023, citing rising interest rates and fuel prices as key risks to growth. In a previous article, I discussed why I believe a “formal” recession, as qualified by The National Bureau of Economic Research (NBER), is unlikely this year for two reasons. First, the job market remains tight, and those made redundant are quickly finding jobs. Second, consumers are entering 2023 with the highest cash-on-hand balance in decades, as many exit the stock market after the recent selloff. These two factors cast doubt on whether a downturn is indeed coming.

In this article, we give a review of the economic week ahead, including the Fed’s December meeting minutes, The Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI), and Job Openings and Labor Turnover Survey (JOLTS), and what to watch for in the economic data released during the week.

ISM Manufacturing PMI

The ISM Manufacturing PMI tracks trends in US industrial sector via a monthly poll of purchasing managers of manufacturing businesses across the country on topics ranging from prices, production levels, hiring, and new orders. Purchasing managers often have the most up-to-date and relevant information on how their firm sees the economy, rendering the index a leading indicator of economic health.

In October and November of last year, manufacturing PMI demonstrated a noticeable softening in manufacturing activity, with the sector entering contraction territory in November for the first time in two years, since the start of the COVID recovery in the summer of 2020. Despite this, there are currently no signs that the economy is in a recession since the recent drop comes after reaching record highs.

Another critical point is the discrepancy between different sectors in the PMI data. The best-performing industries in Q4, based on data available so far, with two consecutive months of appreciation, are:

• Apparel, Leather & Allied Products
• Nonmetallic Mineral Products
• Petroleum & Coal Products
• Transportation Equipment
• Miscellaneous Manufacturing

The worst-performing industries with two consecutive months of contraction are:

• Furniture & Related Products
• Wood Products
• Paper Products
• Textile Mills
• Printing & Related Support Activities
• Fabricated Metal Products
• Chemical Products
• Computer & Electronic Products
• Food, Beverage & Tobacco Products

Here is what to watch for in the next PMI:

First, the performance of the biggest industrial sectors with the most significant weight on the VOO, including:

• Computer & Electronic Products
• Chemical Products
• Fabricated Metal Products
• Transportation Equipment
• Food, Beverage & Tobacco Products
• Petroleum & Coal Products

Second, the sequential expansion or contraction of the best and worst industries listed above could guide investors on sector trends, driving investment decisions in specific industries through sector-specific ETFs.

Third, any signs of a bounce in consumer inventories, which have been low since at least January 2022. Lower prices and low consumer inventories, along with faster supplier deliveries and ease of material shortage in September and October, should incentivize sales managers to pursue aggressive sales campaigns in December and the months to come. Restocking inventories to pre-recession levels would provide a major boost to GDP and, subsequently, the VOO ETF.

Job Openings and Labor Turnover Survey

The US Bureau of Labor Statistics will be releasing the JOLTS report on Wednesday for the November employment figures. Comparatively, this is a laggy indicator but can give more information on the state of the job market. In October, job openings edged lower but remained at historically elevated levels. The decline wasn’t uniform across sectors, with nondurable goods manufacturing, Federal and Local government job openings witnessing the largest declines, offset by job opening growth in Services and Finance.

We continue to see a tight labor market where supply continues to outstrip demand, something that will keep wages increasing, exposing the VOO to downside risk, as the “good news is bad news” dynamics remain in play, as the Fed incorporates labor statistics data in its monetary policy decisions.

On Thursday, ADP® will release the National Employment Report, a widely followed economic indicator of non-farm jobs added to the economy. In the past few months, we saw the economy adding jobs at a slower pace compared to previous periods, but with no indication of the recession yet, with unemployment rates holding steady so far.

Our view of the situation is that the job market will remain strong but off its 2021 peaks, giving the Fed more leeway to fight inflation, which remains above target for now. Human resource managers in most sectors are not implementing huge layoffs nor expanding headcounts at this stage – adopting a wait-and-see strategy before rushing in to hire or fire more people.

FOMC Meeting minutes

On Wednesday, the Fed will release minutes from the last Federal Reserve meeting in early December. The minutes give an insight into how policymakers view the economy and whether they think the Fed needs more monetary tightening to prevent inflation from picking up. Last month’s inflation data from the US suggests the economy is cooling down from its peaks, so this could give some insight into how hawkish Fed members are getting and whether they think another rate hike will be necessary for the coming months.

The Fed has raised interest rates four times this year and has said further hikes will be needed in the future to ensure price stability. However, the minutes of the latest meeting showed concerns about a slowing global economy, so we could see a more dovish tone in the latest minutes. During a press conference earlier last month, Fed Chair Jerome Powell signaled that the central bank would be “patient” regarding future rate hikes, which I believe means there could be only one or two more rate increases in 2023.

Summary

Until now, monthly economic data show a small downtick in economic activity, but we are nowhere near a recession. ISM Manufacturing PMI and Job Openings and Labor Turnover Survey for December month will provide a clearer picture of what to expect this earnings season as VOO constituents start releasing their Q4 2022 financial reports. Critical price data from the manufacturing PMI and job opening figures from the JOLTS could have a significant impact on the market as the Fed adopts a data-driven approach to its monetary policy.

Sub-index performance data from the PMI on Wednesday could also guide shareholders in their investment decisions, as high-weight sectors, such as Energy and Electronics, could weigh on the market performance, and smaller industries could signal investment opportunities in sector-specific ETFs.