Stocks had a mixed close yesterday after a late-session rally propelled some shares into the green…tech was not invited to the party. Bond yields continue to creep higher in response to last week’s hawkish comments by Jerome Powell… well done, Mr. Chairman.
Ugliest dog contest. This is actually a thing; in case you have never read about it. Dog owners enter their beloved pets in a contest in which the ugliest of the pack gets the prize ribbon. Though the contest has been going on for the past 50 years, I am quite sure that it lacks the prestige of the Westminster Kennel Club Dog Show, or even the Doggy Olympics, but hey, it’s a free country, and as long as the winner’s feelings are not hurt, please enjoy. I am not sure that I can tell the difference between one ugly dog or another (they are all cute to me), but I do know an ugly economic number when I see it – as evidenced by my bowtie and ever-thickening reading specs. That skill of recognizing bad economic data will serve investors well in this current market regime. I am sure you are thinking, “obvious, Mark, bad economic numbers are bad for the economy and bad for stocks – give us some credit.”
Not so fast. Of course, that seems obvious but, as I have said time and time again, markets rarely, if ever, do what is convenient for investors. You see, the Fed, by design, has struck fear in the hearts of consumers and investors. They are literally on a smear campaign, hoping that you will tighten your purse strings and fear that the market will wipe out your 401k. Perhaps THEN, you will stop spending so much money and force producers and retailers to lower prices. Seems draconian, but that is how it works. Of course, the Fed doesn’t want to scare us so deeply that the economy completely collapses. It is, after all, part of the Fed’s mandate to keep the economy healthy through high employment. We talk a lot about how difficult the Fed’s job is balancing inflation fighting against low unemployment, and how the bankers will have to thread a fine needle to get us through this period. However, the Fed’s job has gotten easier in the past several months.
Currently, high inflation is priority number 1. It is a real priority for yours and my household budgets, and it is also the priority of politicians who wish to have longevity in the nation’s capital. So, it is clear that the Fed will have to sacrifice some economic health in order to tamp inflation down. The Fed Chairman, in his Jackson Hole speech said as much. He may even have used those very words. Those and all the similar-themed ones are what tripped up both the bond and stock markets in the past week. Stock markets digest bad news and attempt to forecast first, its gravity, and second, forecast what will happen after the tough passage ends. Prior to last week’s speech, stock investors had factored in higher interest rates through next May, though they harbored hidden hopes that rate hikes would level off by Thanksgiving. Those hidden hopes drove July’s rally. Chairman Powell’s speech last Friday essentially quashed those hopes, reminding stock investors what they already knew: interest rates are going to keep climbing through at least mid-2023. The Fed essentially has a license to be overtly aggressive, as long as the economy holds up, and it has been surprisingly resilient. Earlier in the week we learned that Consumer Confidence is healthy and growing. Yesterday we received data that suggested that manufacturing too is healthy and growing. These good economic numbers give the Fed the confidence they need to be aggressive in word and action.
Today, we will get the monthly employment numbers from the government’s Bureau of Labor Statistics. That is a critical economic release which will surely be factored into the FOMC’s rate decision later this month. Strong employment numbers will be good for the economy…and they will also embolden the Fed to strengthen its resolve. On the contrary, if numbers are bad, the Fed may be more thoughtful on its path of rate hikes, at least for this upcoming meeting. A really ugly number would have stocks and bonds come out winners. Expect ugly numbers to be highly prized by capital markets in the weeks and months ahead. I leave you with a picture of this year’s Ugliest Dog Contest winner: Mr. Happy Face.
YESTERDAY’S MARKETS
Stocks had a mixed close yesterday early selling in response to strong manufacturing numbers gave way to late-session rallying into the close. The S&P500 gained +0.30%, the Dow Jones Industrial Average climbed by +0.46%, the Nasdaq Composite Index declined by -0.26%, and the Russell 2000 Index dropped by -1.15%. Bonds fell and 10-Year Treasury Note yields gained +6 basis points to 3.25%. Cryptos fell by -1.18% and Bitcoin slipped by -0.62%.
NXT UP