2023 | February 13

The Markets

Stocks Fall

Although its weekly decline of 1.1% was modest, the S&P 500’s setback came on the heels of two weekly gains in a row and marked the index’s biggest weekly drop since mid-December. The NASDAQ posted a steeper decline of 2.4%; the Dow slipped about 0.1%.

The year-to-date performance leadership of U.S. small-cap stocks took a hit, as a small-cap benchmark, the Russell 2000 Index, dropped around 3.3% for the week versus the 1.2% decline for a large-cap peer. 

The inversion of the yield curve grew to its widest margin since the early 1980s, as the negative spread between the yields of 2- and 10-year U.S. Treasury bonds swelled to 86 basis points at one point on Thursday. On Friday, the spread moderated, with the 2-year yield at 4.51% versus the 10-year note’s 3.74%.

The price of U.S. crude oil rose nearly 9% for the week to almost $80 per barrel on Friday. Some of the increase was attributed to Russia’s announcement on Friday that it plans to cut production in March by 500,000 barrels a day—about 5% of its output—in response to recently imposed sanctions. 

U.S. Federal Reserve Chair Jerome Powell said on Tuesday that the process of lowering inflation to the central bank’s goal of 2% “is likely to take quite a bit of time” and will probably be “bumpy.” His comments in a moderated discussion came after a week highlighted by an unexpectedly strong jobs report and yet another Fed rate hike. 

With the current quarterly earnings season winding down, analysts have been cutting their forecasts for first-quarter results that companies will begin reporting in April. Last month, analysts cut their earnings-per-share estimates by an average 3.3% for companies in the S&P 500, according to FactSet. While analysts typically cut estimates during the first month of a quarter, January’s average reduction exceeded the 1.5% average of the past five years.

Inflation in China is picking up, even though its official statistics show that prices remain stable relative to those in many other major economies. China reported that its annual inflation rate rose to 2.1% in January, up from 1.8% the previous month. Friday’s report came a couple months after the world’s second-largest economy lifted restrictive COVID-19 rules.

A Consumer Price Index report scheduled to be released on Tuesday will show whether the recent moderation in inflation extended into January. In December, inflation rose at an annual rate of 6.5%, marking the smallest year-over-year increase since October 2021.

Source: John Hancock Investment Management

TD Paperless Preferences

Asset or Liability?

When companies total up assets and liabilities for accounting purposes, employees aren’t counted as assets. It’s a peculiarity that has significant repercussions and the potential to negatively affect both employees and shareholders, suggested Wharton professor Peter Cappelli in the Harvard Business Review.

“Many common practices for managing employees are hard to explain,” he wrote. “Why do companies obsess over cost per hire but spend so little time trying to see if they make good hires? Why do they provide so little training when we know it improves performance and many candidates say they’d take a pay cut to get it? Why do firms delay filling vacancies and let work go undone? Why do they spend so much money leasing personnel from vendors rather than hiring their own?”

Cappelli contends the problem is rooted in the standards set by the Financial Standards Accounting Board (FSAB) in the United States. While many companies assert that employees are their most significant competitive advantage, that belief is not reflected in generally accepted accounting principles for publicly traded companies. FSAB-established standards don’t count spending on employees – such as wages, salaries, training and development, and benefits – as investments. Instead, those expenditures are treated as expenses and liabilities.

“…accounting rules say that items with value are assets – but only if they’re owned by the company. On that basis, employees are not considered assets – even though the tenure of a valuable employee is often far longer than the life of any piece of capital equipment. Even when a company buys other businesses to get access to their skilled employees, the acquisition of talent cannot be treated as an investment.”

Under current accounting standards, layoffs are one way for employers to rapidly lower costs and make balance sheets look more attractive. The loss of knowledge, skills, and abilities that accompanies layoffs doesn’t factor into financial accounting, even though it may negatively affect company productivity.

While accounting standards have yet to change, companies’ thinking may be. In a Bloomberg opinion titled, ‘U.S. Companies Aren’t Firing People As They Usually Do’, Kathryn A. Edwards wrote, “…the trade-off between short-term cost-cutting and human capital appears to [be] changing as qualified workers become harder to find and hire.”

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