Indexes Are Slammed as Economic Slowing Suddenly Matters
Stocks suffer their worst day of the year on indiscriminate selling as the market repositions to be more focused on a slowdown rather than inflation.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
For a couple of years now, market participants have been hoping that inflation would slow and the Fed would cut interest rates. Economists have been dead wrong about how soon the Fed will cut rates, but after the Jerome Powell press conference on Wednesday, it looked like a done deal for September. Bonds rallied, and interest rates fell. They have now priced in three full rate cuts in 2024.
There is one big problem. The main reason that the Fed can cut rates is because inflation is cooling off due to a slowing economy. There have been some signs of economic slowing for a while, but the market hasn't cared much because it is so focused on inflation and interest rates. The cuts are coming now because it is very clear that the economy is slowing. Economic slowing suddenly mattered on Thursday and triggered major macro moves.
On Thursday morning, there were reports that both manufacturing and construction spending was lower than expected. There also have been warnings in earnings reports from companies such as McDonald's MCD and Wayfair W. The labor market is also slowing, and the jobs news on Friday morning may confirm that.
It appeared that major macro programs were at work on Thursday to reposition the market to be more focused on economic slowing rather than inflation. The best evidence that this is a program at work is the very broad selling. The programs sell the ETFs, and when they sell ETFs, every stock in the ETF is sold, for example. The Russell 2000 IWM took a massive hit of 3.2%. Only 190 of the 1,976 stocks in the index were positive. Virtually everything was sold without regard for its individual merits.
It was a bloodbath, and now the question is whether this is the start of a major market shift. Maybe, but even if it is, it will be very choppy, and we will see some countertrend action.
The first issue to come into play is earnings from Amazon AMZN and Apple AAPL. Amazon's revenue is soft, although it did beat on EPS. The stock is down initially. Apple's reported a beat and the shares are trading up, but the conference call will be important.
The next issue will be the July jobs news on Friday morning. If this report is soft, there is going to be some talk about how the Fed is behind the curve and should have already cut rates. We will no longer see weak economic news as good because it is anti-inflationary.
We still have plenty of earnings next week, and it will be very interesting to see if small-caps can deliver some relative strength. Big-caps are having their valuations reconsidered, and that is a big part of Thursday's weakness.
I expect we will see some rebounds and increased volatility, but there is no question that the market is undergoing some major shifts in response to changing economic conditions.
Have a good evening. I'll see you Friday.
At the time of publication, Rev Shark was long AMZN.
