“I can't stand rockin' when I'm in here
'Cause your crystal ball ain't so crystal clear.”
Beastie Boys, Sabotage
I wasn’t expecting last week’s rally. You may have noticed from last week when I wrote, “…The reality is that we are extremely likely to re-test Monday’s lows. At this point, we expect a re-test followed by recovery with an increase in market breadth to the upside.”
As we all know, the stock market has a way of making fools out of the most people possible, and well, prediction is very difficult, especially when it's about the future.
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While I was surprised by the timing of the rally, it was driven by a lot of the things we have been scrutinizing:
There weren’t any big financial meltdowns (e.g. Long Term Capital when the Russian ruble was devalued in 1998).
The Middle East was calm despite our view that the potential for strikes by Iran against Israel has increased dramatically in recent weeks.
The inflation news from the PPI and CPI was encouraging.
No banks failed, no missiles flew from Iran, and the CPI came in (remarkably?) friendly. And while stocks didn’t get the smack-down to their previous week’s lows, we did see the sort of healthy surge in market breadth on the bounce that historically occurs following a rout.
Another relief for the market was that, according to the Commodity Futures Trading Commission (CFTC), hedge funds switched their positioning on the Yen to net long from massively short for the first time since 2021. This would indicate that the vast majority of carry trades (i.e. borrowing yen to buy higher yielding assets) have been unwound-- yet another positive for our domestic stock market.
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There are a couple of events we’re watching this week. The first is the Jackson Hole Economic Policy Symposium with US Fed Chair Powell speaking on Friday. Powell may give more clues as to the pace of the current global easing cycle by central banks. Given the recent turmoil at the Bank of Japan, it strikes us as unlikely that central bankers would say much that is not altogether soothing to financial markets.
It was pointed out to me by a client recently that I have been bagging on the quality of the Bureau of Labor Statistics’ employment reports in what seemed to be a political commentary, but as I explained, it has nothing to with critiquing the Biden administration-- rather, it has been a running critique of the political process in general. It was a timely discussion because the other thing we’re watching for this week is the possibility that the BLS may roll a grenade down the hallway when they once again revise their goal-sought numbers.
Bloomberg Chief Economist Anna Wong just wrote, “We estimate that nonfarm payrolls as reported by the establishment survey will likely be revised down by 730k for the last three quarters of 2023.” Speaking to the trend continuing in 2024, she said: “The labor market has been cooling for awhile — the deterioration isn’t sudden. Given its dual mandate, the Fed is likely behind the curve on cutting rates. As such, we expect the unemployment rate to reach 4.5% by the end of 2024.”
What Wong was referring to is the likelihood that on Wednesday, the Bureau of Labor Statistics will revise jobs downward for the April 2023-March 2024 period by close to one million. That would basically mean that all "beats" recorded in the past year will have actually been misses and that the US job market is in far worse shape than anybody wants to admit.
And it makes sense that they will. According to the latest report published by the non-partisan California Legislative Analyst’s Office (LAO), contrary to prior reports of substantial job gains in 2023, our reality was pretty ugly. In LAO’s report titled “Newest Early Jobs Revision Shows No Net Job Growth During 2023,” it was found that, according to the Early Revisions to state-level data, California actually lost jobs during the fourth quarter of last year. As the report detailed, "based on the most recent release of the early benchmarks, payroll jobs declined by 32,000 from September 2023 through December 2023. On the contrary, the preliminary monthly reports showed a solid increase in job growth (+117,000 jobs) at the time."
+117k to -32k. I dunno-- was that a mistake by some incredibly stupid people, or was it data manipulation by some very smart people?
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Back at the end of 2023, we suggested that 2024 wouldn’t be a year of a hard landing or a soft landing, that it would probably be the year of no landing at all. That still seems likely. As for the stock market, we expect a mildly upward trajectory for the remainder of the year, but we don’t think we’ve completely graduated to a low volatility environment. It’s an environment ripe for buying dips, and we expect another one in relatively short order.
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