The markets don't like that U.S. labor gains are leveling off.
Economic data indicates that job opportunities in America are falling from the torrid growth rates of the past. It is what the Fed has been looking to achieve so why are investors unhappy?
The most followed employment indicators--JOLTS data, the ADP National Employment Report, the ISM Services Purchasing Managers Index, and non-farm payrolls--all indicate that job growth in August is slowing across the nation. That may not please Main Street, but it is what both the financial markets and the Federal Reserve Bank were hoping to see for most of the year. But some might say be careful what you wish for.
Many traders fear that both the economy and labor market are declining at a rate that is much faster than the Fed expects. Some accuse the present administration of fudging the employment data to paint a rosier picture of growth before the election. Others believe the U.S. Treasury has deliberately avoided auctioning too many longer-dated debt securities to keep the benchmark, Ten-Year, Treasury bond yield from spiking higher.
As a result, many economists believe the Fed is already behind the eight ball regarding the labor and growth data. As each weakening data point is revealed, the stock market gets jumpier and the betting that the Fed will need to cut more than 25 basis points is climbing rapidly.
As for the markets, recession talk dominated the corridors of Wall Street as the employment data continued to shake the markets' confidence. The week was spent trending downward waiting for Friday's non-farm payroll results for August.
That data was another disappointment. The economy added fewer jobs than expected (142,000 gains versus 165,000 jobs expected). In addition, revisions to both June and July numbers cut another 89,000 jobs off the last three months' gains.
In last week's column, I warned readers that September into October could be bumpy for the stock market. "Many who follow technical charts are convinced that a pullback will occur. It is just a question of when. I agree," was my closing statement.
And bang—right out of the gate—the month began with more than a 3.6% decline in the S&P 500 Index as investors returned from the Labor Day holiday weekend. It is just the beginning of a period between now and the elections where investors will need to hold onto their seats. Markets will get oversold, have relief bounces, and then give back all the gains.
The long-awaited decision by the Fed to cut rates will be upon us over the next two weeks. The markets have already discounted rate cut after rate cut each month for the rest of the year and into 2025. I am afraid that may be too optimistic, and if so, disappointment could trigger a steep decline rather than a continued upside in stocks in the months ahead.
The market's direction after September 18 will depend on how much the Fed cuts and how forthcoming Chairman Jerome Powell and the FOMC members will be telegraphing the Fed's plans between September and through the remainder of the year. But that is two weeks away.
In the meantime, I expect a bounce in the markets once this decline runs its course (likely by early next week). Why? I expect investors' present recession concerns will morph into hopeful anticipation that the Fed will 'save us' from this dilemma by cutting interest rates faster and deeper than originally thought. But hope, as I have often said, is not an investment strategy.
I expect readers are catching my drift that the weeks ahead are chock full of the unknown. In addition, politics, both here and abroad, will continue to upend markets in unpredictable ways. We could see stocks traverse a wide trading range through at least the beginning of November. Only highly sophisticated traders should consider playing in this minefield; for the rest of us I suggest hands under buns.
One final note, I feel it is necessary to give investors a heads-up. I believe that the macroeconomic data this week and possibly for prior months is being leaked. I know this is a serious charge, but the price action before every labor data point release this week leads me to believe that investors are no longer on a level playing field. The long-term implications of this illegal practice in U.S. markets are immense.
Bill Schmick is a founding partner of Onota Partners, Inc., in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners, Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or e-mail him at billiams1948@gmail.com. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal.