Omicron led to 'short but shallow economic damage,' market strategist says

National Chief Market Strategist Art Hogan joins Yahoo Finance Live to discuss the outlook for the labor market and economic recovery amid the Omicron wave.

Video Transcript

- Want to stick with the markets now and bring in Art Hogan, Nationals Chief Market strategist. Hi, Art, always good to see you. I want to start with this.

I'm going to call it stunner of an ADP payroll report. Companies cutting over 300,000 jobs last month as omicron really slammed the labor force. Why isn't the market reacting more aggressively to this report, do you think?

ART HOGAN: Well, I'm pretty sure the White House gave us a sneak peek at just how bad the omicron's variant in the seasonality around December were going to adversely affect the jobs numbers this week. So remember, we'll get the non-farm payroll number at the end of the week. And the White House beat the Christmas rush and got out and reminded everybody that especially the week that we're measuring was the peak of case discovery for the latest variant.

So that obviously had some effects on the numbers. What's important here, clearly, we need to look at the trend and the three month trend versus any point in time because there's a lot of volatility around these numbers. And clearly, the ADP number last month was 2x what we thought what the estimates were.

So it's one of those things where we're just going to have to get used to the short but shallow economic damage that we saw because of the latest variant. This is one piece of that. We also saw that in some of the retail sales coming out of the December month as well. So clearly, omicron had an effect. The good news is most of that is likely behind us. We've clearly peaked in new case discovery. So the months of January and the first quarter likely get sequentially better, especially around labor inputs.

- I know economists are expecting non-farm payrolls to have expanded by about 150,000. I think that would be the weakest since the end of 2020. What are you expecting there, Art?

ART HOGAN: Yeah, we're not too far askew from that estimate. We're at 163,000. But again, all of the estimates that we've seen over the course of the last six months have been pretty far off of the mark. And most of the misses that we've seen have been in the upward revisions that we've seen on the two and three month basis.

So if you actually include the upward revisions that we've seen just in the third quarter in the first two months of the fourth quarter, that adds another 175,000 jobs that were created. So I just think that it's difficult to count the number of jobs created in any given month. We've always had big revisions. But this is the biggest delta between the initial report and the final revision that we've seen going back four years, probably as long as the data has been kept.

So again, we don't really want to point to any-- take any one point in time and say this is a new trend. I would argue that the difficulties that employers had with creating new jobs. And remember, if you were out sick with or going through your five or 10 day quarantine with the omicron variant, you weren't counted as a job. That came off of the payrolls.

So I think this is going to be a short-term blip. I think once we start getting the January and February numbers, we'll be back to that resumption of creating somewhere between 200 and 400,000 jobs a month.

- Yeah, definitely is going to skew the numbers for sure. Want to get your tech, though, on big tech, your take rather on big tech because it really had a rough start to the year. But so far this earnings season, the news has been pretty good from those mega caps. We had a pretty spectacular earnings from Google's parent, Alphabet and Apple. We are going to hear from Facebook's parent Meta after the bell today. Amazon out tomorrow. What's your feeling on the sector overall right now?

ART HOGAN: Well, we certainly have seen a lot of multiple contraction. I think that goes without saying. When we think about how much that space has come in from its all time highs. And this goes all the way back to the first week of December.

So it's not just a 2022 event. We've seen for a variety of reasons, we've seen multiple compression and growth. And most of that predicated on yields rising.

And clearly from the beginning of December the yield on the 10 year at or about 1.34 got as high as 188. We settled into a 1 and 3/4 range now over the last couple of weeks. But that multiple compression to get back to net present value on some of these fast growing technology companies clearly came at us very rapidly. So therefore, I think you have situations like Alphabet coming in with a blockbuster report, not trading at or near its all time high at the time.

So I think the earnings season will be more favorable for some of these names to come out. I think that includes Apple and certainly includes Alphabet today. And when we look out at that Microsoft's report and the ones that are coming up like Facebook, I would certainly say they're coming in at a much better place to have a more conventional reaction function to what the news is.

- All right, and finally, I know that your target for the S&P 500 is 5,300. That would be roughly a 13% gain. That's a pretty bullish outlook. What do you think is going to get us there, Art?

ART HOGAN: Earnings. I think we're going to see earnings growth, above mean earnings growth for 2022 for the S&P 500. The consensus right now sits at about $225. I'm up at $240.

I think we'll start to see revisions higher for earnings estimates as we work our way through this earnings season and into the first half of this year. So if we just used a simple multiple, the average multiple that we traded at for the last three years on those earnings, that gets you to 5,300, not suggesting that happens in a straight line. But I certainly think that we're going to have above mean GDP growth in 2022.

I think we're going to have above mean earnings growth typically the first year of a rate hike cycle. You're able to accomplish about half of what you did the year before. We had a 26% return on the S&P last year. So I suspect that it's not that much of a reach to think that we can have high single digits or low double digit returns in the S&P.

- All right, clearly, you see the glass is half full. Art Hogan, the Nationals Chief Market Strategist. Always good to see you. Thanks so much.