The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Dipsy-do
Nonfarm payrolls (+22k vs +75k est & +79k prior revised from +73k) were weak. Bonds rallied immediately as markets priced a 25 bip cut in September with greater than 100% certainty. An October cut jumped in probability too and talk of a 50 bip cut in September sprung to life. Equity futures rallied strongly as a result of the projected lower interest rates and Treasury yields came down about 6-9 bips across the curve. The S&P 500 opened up about 26 points, setting new all-time highs but fell down around 10 AM and went negative 15 minutes later. The rest of the day, stocks bumped along in negative territory, slowly clawing back some value. Capital flow was heavy at 123%.
Nobody has a clear cause behind the equity market’s slide after the open. Some argue that the labor number was too weak, suggesting that the Fed is behind the curve and that recession potential is climbing again. Until we hear different, that’s probably the best rationale. Lower rates will certainly help valuations and spur economic activity, but if the tariff damage, or other economic influences, have shifted the economy towards contraction too greatly, we’re in for trouble.
As it stands, the market is not too worried. If recession were considered likely, we’d be down multiple percent.
I think the market is now re-sensitized to recession risk. This has happened many times before over the year. The old playbook tells us to watch the trickle of economic releases closely and extrapolate the health of the economy as we gather info.
If the data shows US economic resilience, as it did before, each data point will spur a rally. The opposite is also true.
At this point, I’d consider the legacy momentum to be dead. We’re in a new phase. It’s the show-me phase.
If data shows health, buyers will generate new highs. New data will create new momentum. Just following the chart and hopping on probably isn’t the play.
Of course, if data prints nicely for a couple of weeks, the longer-term chart will look even better and more prophetic and momentum will build from there.
PPI and CPI will be key releases next Wednesday and Thursday.
Have a great weekend, see you Monday.
-Mike
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