Big News Events Will Test Index Strength
Jobs numbers are on deck, but will weak economic reports continue to be positive news?
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We are wrapping up the holiday week with the S&P 500, Nasdaq, and Nasdaq 100 QQQ at new all-time highs, but a flood of news awaits that could trigger a market top.
Friday’s market session is likely to be light, with many market participants extending their Fourth of July holiday before returning to work next week when earnings season begins, and some big banks will report next Friday.
The focus Friday will be on the June payroll reports. There has been some slowing in recent jobs news and Friday's numbers will help to clarify if a trend is building. The unemployment rate is expected to stay at 4% while the increase in payrolls is expected to be around 185,000, which is a sharp drop from the surprisingly strong 272,000 that was reported last month.
There has been a very large divergence between the household number and the regular data, which has made this data quite confusing lately, although there have been other reports that confirm that there is softening.
The main issue that the market is grappling with when it comes to economic reports is whether soft economic news and a weaker jobs market are positive because they are anti-inflationary and suggest that a rate cut is coming sooner rather than later, or is weak economic news a negative because it indicates there will be pressure on business and consumers even if interest rates are lower.
While the market has not been at all concerned about a slowing economy, some market strategists believe that by the time rate cuts actually occur, they will not be a positive catalyst because they are already well anticipated, and the economy will already be in a downtrend.
In addition to the debate between inflation and economic growth, the upcoming earnings season will present another hurdle. The Magnificent Seven and other big-cap technology names have been cruising higher lately but how much positive news has been priced in at this point? Expectations for the next round of earnings from the mega-cap names are going to be extremely high, and the risk of a sell-the-news response will be very elevated.
Another issue I am watching closely is the potential for rotation out of the small group of mega-caps that are driving the indexes and into everything else. There have been several weak attempts at rotation that have failed, but anticipation of rate cuts may help smaller stocks that generally carry higher levels of debt.
Jobs news is coming at 8.30 am ET.
At the time of publication, Rev Shark had no positions in any securities mentioned.
