Skynews are making out this is a huge event, and a potential US recession.
The jobs report saw a jump in unemployment, which has been inching up from record lows. The reason? The Fed is keeping interest rates high to try to FORCE LAYOFFS AND COOL INFLATION.
Inflation has been slowly retreating, but has remained stubborn at around 3%, Vice the Fed’s 2% target rate. They’ve made clear they are not going to wait until it gets to 2%, but they want to see it continuing towards that level. Wages have been fueling consumer demand, but Q2 results of consumer discretionary companies have shown that is weaker than expected.
So, as the consumer slows down, company results are down, which is helping inflation slow, as job losses increase.
NORMALLY, all of these things would signal we are on the verge of a recession, but these are all currently being manipulated by Fed Policy.
However, the fear is that, much as the Fed was late to raise rates quickly when post-COVID inflation rose dramatically, so they will be too slow to lower rates (fearing an uptick in business activity and thus a resultant uptick in inflation!).
In Japan, where people borrow at 0% to invest in the booming US equity market, the interest rate was suddenly raised about 25 basis points for the first time in almost two decades. That led to a mass panic in Japan and left Japanese arbitrage investors looking for the exit…and the massive selloff began!
It reverberated around the world, mainly because they invest so much in high tech US stocks, many of which had a “meh” second quarter, yet said 2024 would still be a good year and 2025-26 would be gangbusters, due to lower rates (that aren’t here yet!).
The U.S., which is still up handsomely for the YTD is entering a seasonal soft period (Sept) where stocks often pause or retrench, so this whole series of events looks like an early continuation of the pullback in U.S. equities, albeit in a short, sharp reflexive drop.
Normally, the U.S. equity day is a 3 step process…
1) The open, which is based on the events of the global day, which has already occurred in Asia and is in full swing in Europe
2) The midday period, which watches how Europe settles out and how European late day trading sets up for the next trading day
3) The afternoon and close, with the last hour of trading creating the investment psyche and impetus for the next global trading day in Asia
Currently, the Mag 7 are still driving the market, both up and down, but there is so much money chasing those gains (and passive funds and even large ETFs needing to take massive positions in them) that they have become ATMs. If you want money out of the market, you sell the gains in some of these high tech high flyers! In short, they trade for reasons other than fundamentals and can thus be whipsawed by the desire to take profits or liquidate large positions to access cash.
I personally have large stakes in numerous of these companies and have watched them be whipsawed intra-day/week/month/year, yet their lower left-upper right trajectory has remained intact.
Getting back to the Fed, there may be a strong case now for them to cut rates by 25 basis points BETWEEN MEETINGS, which is a tad rare, to stop any anxiety from creating the self-fulfilling prophecy of high rates and external influences driving the US towards a recession, then adding another, already anticipated, 25 basis point cut in September at their meeting.
Many observers are concerned that the Fed isn’t nearly as nimble as they should be, and often close the barn door after the horse has bolted. They believe the loooong period of high interest rates has actually damaged some underlying economic engines that need reigniting before the lagging effects take hold.
The quandary is that small interest rate HIKES are slow to impact the economy, as no-one knows how high they might go and the incremental change can often be manageable in the strong economy that creates the hikes, whereas interest rate CUTS are often taken as a signal that rates are going to continue to decrease.
In a 9-12 month forward looking company/equity market, the presuppositions that 25 becomes 50 becomes 75 becomes 100, and equities often take off as economic activity begins to pick up again.
So, what does all this mean?
The US has been looking for an excuse to have a brief, possibly even sharp, correction in the MAG 7 stocks that have driven the market to record highs. That correction was happening over the course of the Q2 results reporting season, with one company in a sector often creating the downdraft (or updraft) for that sector.
Last week, Amazon created a downdraft. The BoJ just created another, much more significant, one based on the Japanese money in US tech. That caused a big wave to wash around the globe as markets opened in the Asia, the ME, Europe and the U.S.
At one point last night when I was watching, US futures were down over 1,000 points. However, from the open in the U.S., traders saw that as the opening they need to deploy capital.
As that washed through the market during the European close, equities were much improved from the open, albeit still down 2-3%.
Now, as we approach the close, we see Wall Street starting to position for what they thing the rest of the world is going to do to the markets overnight, and the steady decline during the afternoon session has barely caught a bid. That means Asia will open to reflect the bad sentiment in the U.S. post-European close (albeit with the chance that Japanese policy confuses and possibly exaggerates things), and the cycle will begin again for Tuesday in the U.S.
History shows that many, many times these events are short, sharp and even violent, but the opportunity to get out and back in BEFORE the POTENTIAL violent upswing is fleeting and a fool’s errand!
I believe AMZN, GOOG, and META, will all be much higher in 3-5 yrs than they are today and were last week. That’s why I haven’t touched a penny of their value this past week.
That said, I’m getting ready to put money I’ve been holding for a period just like this one to work!
Never a dull moment!
