The Pivotal Moment
The moment that investors have been waiting for all year has arrived...
An imploding jobs market. Sometimes I wonder, am I bullish or bearish?
"During two days of congressional testimony this week, Federal Reserve Chair Jerome Powell made the beginning of [another] pivot on interest rates that might prove more durable than one that sparked a big market rally at the end of last year...When Powell testified on Capitol Hill in March, he allowed that the Fed was “not far” from achieving the confidence it needed to cut rates...When inflation turned up in the first quarter and the economy showed solid growth, the justification for lower rates crumbled"
"His comments suggest he thinks “inflation is back on track” while the labor market “is on the edge of an unwanted slowdown”
The trillion dollar question is what does Powell know that we don't know?
This chart shows job openings for leisure and hospitality.
Powell's comments were widely quoted in the media as him having said that there are risks to keeping rates too high for too long. Which is ironic because by the end of this month interest rates will have been at the same level as 2007 for one year which is the same duration as 2007.
In the chart below, I capped the unemployment scale (lower pane) at 7% to give better visual representation of today's nascent spike in unemployment, albeit off of very low levels.
It's important to acknowledge that when unemployment started rising, the Fed started cutting rates all the way down to 0%, but unemployment kept rising even after rates reached 0% - all the way up to 10% unemployment. In addition, the stock market kept falling to -55%.
In other words, it's highly probable that then as now, the Fed kept rates too high for too long due to end of cycle inflation, as usually happens in ever cycle in U.S. history.
This week we were informed on Barron's that the AI bubble is broadening out to include stocks with declining revenues, such as Apple and Tesla. But that would mean that investors are buying overvalued stocks with crumbling fundamentals in front of a recession. In other words, there is a chance that the bellwether mega caps are signaling nascent economic downturn which is being ignored due to AI fever.
"Tesla stock has gained for 10 straight days, and Apple’s market value has surpassed $3.5 trillion. That’s remarkable in itself, but what’s more interesting is that it has happened despite both companies’ sales slowing"
"Fund managers such as BlackRock expect the excitement around AI to fan out to other companies and sectors. Apple and Tesla’s recent recoveries suggest it’s only just beginning"
Tech stocks are as overbought relative to the 200 day moving average as they were in the summer of 2020 right before the FIRST Trump/Biden election.
Rate cut fever is of course a global phenomenon. The media has never stopped to question this assumption. Only one time in the past 40 years (1995) has more than three rate cuts led to higher stocks. All six other times, stocks went into a bear market. So if the Fed really has to cut rates to buffer recession, the odds favor this era will resemble the six out of seven.
Nevertheless, investors have learned to front-run central banks ahead of rate cuts. Which means global markets are highly overbought just as rates are starting to come down.
In a deflationary rate cutting environment, investors have a choice to buy long duration assets which includes growth/Tech stocks or long-term Treasury bonds. However as we see below, Tech stocks have never been more overvalued relative to long-term bonds.
Which to buy if rates come down?
In summary, it's now highly likely that bulls are "right" and rates are finally about to come down.
If so, then investors trapped in overvalued stocks with imploding revenues, is just beginning.
