Stocks and Bonds Have a Disconnect Going On
This market loves the economy right now, and the jobs news Friday did nothing to upset the love affair.
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The September jobs report was much stronger than expected and triggered a sharp jump in all of the indexes. Small-caps lead the way with a move of around 1.4%, which was reflected in breadth of better than 2 to 1 positive. New 12-month highs were at 460 or so, which is well off the highs of over 1,500 a couple of weeks ago, but an improvement from recent days.
While stocks were flying higher, bonds were not nearly as happy. The 20+ Year Treasury Bond Fund TLT dropped around 1.3%, and yields were up across the board. The odds of a half-point cut at the next Fed meeting in November declined, and it is now expected that there will be two more quarter-point cuts in 2024.
The disconnect between equities and bonds reflects a difference in priorities. Equity investors are focused more on economic growth and are willing to risk a little higher inflation to achieve it. Bond investors are more worried about inflation and are concerned that a rebound is developing. If there is, stocks aren’t worried about it yet.
The employment news did have flaws. A very large number of jobs were government-related, and only 62% of businesses responded to the DOL survey this month. Most of these are smaller businesses that are likely to be slowing hiring more than larger companies. If this is the case, then there is likely to be sharp downside revisions next month.
The jobs data have been notoriously wrong for most of the year, and there are always big revisions, so there is a fair amount of skepticism about how strong the data really are.
The important thing is that the jobs news reinforced the positive economic narrative that has been driving the bullish action. The fact that it might be a bit inflationary didn’t seem to matter to stocks, and there wasn’t much concern that a half-point rate cut would be off the table.
Many stocks continue to be extended and expensive, but strong technical support is holding, and that creates FOMO.
Earnings season is fast approaching, but there is no big economic news on the agenda until CPI next Thursday. There will be a long line of Fed speakers, but this market loves the economy right now, and the news about jobs Friday did nothing to upset the love affair.
Have a great weekend. I’ll see you on Monday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
