The bull market is bucking, changing, and not giving up. It no longer depends exclusively on the shine of seven fabulous papers. The table is set for the FED to start cutting rates in September. The labor report will be released on Friday.
It’s for the bears who watch it on YouTube. Last Wednesday, the bull market collided head-on with the balance sheets of Tesla and Alphabet (Google). It’s not that the profits were meager, but they were not up to expectations. Was the fervor for artificial intelligence exaggerated? Doubts have been ringing for some time. All that was missing was a convincing trigger. And with the unexpected downpour in the balance sheets, the fever immediately subsided. No one was spared from the punishment, but the S&P 500 and the Nasdaq stood out. Both plunged into their deepest decline since 2022. Has the time for correction finally arrived? If it did, it passed us by.
So much so that On Friday there were no signs of a change in the weather. The stock market was working at full speed.The Russell 2000 took the lead and led the way. It climbed 1.7%. It has already been said: the last are now the first. The Dow Jones Industrial Average followed suit with a 1.6% advance. But the battered S&P 500 (+1.1%) and Nasdaq (+1%) also followed behind. None of the eleven sectors of the S&P 500 refrained from rising. The bull market is bucking, transforming, and not giving up. It no longer depends exclusively on the shine of seven fabulous stocks (and on increasing its equally fabulous valuation). It has shown that if that glow darkens, it has other arguments to mount on.
The rotation is consolidated. The company has endured a balance sheet snub, which was not limited to Tesla and Alphabet. LVMH (Louis Vuitton), Deutsche Bank and Ford, in sectors as diverse as luxury consumption, banking and automotive production, also failed the test. Inflation is no longer a problem (Louis Vuitton suffers from consumer reluctance to pay higher prices). Is the economy cooling down, perhaps? Bill Dudleythe former president of the New York Fed, is convinced that it is. The man who was a severe critic throughout the rate hike – always demanding more aggressiveness from the stands – has changed from hawk to dove. “The facts have changed and I am changing my opinion”The table is set for the Fed to begin cutting rates in September. Dudley suggests not delaying it. He recommends pulling the trigger now, on Wednesday when the next meeting concludes.
The reasons for the urgency? The rapid and sustained increase in the unemployment rate. If unemployment climbs by one tenth in July, it will accumulate a half-point advance from the minimum (of the last six months), and the demand will be fulfilled. Sahm rule. Will it confirm a recession? Such is the record of regularity discovered by Claudia Sahm. The labour report will be released on Friday. Dudley advises to act early. The stock market, which is always ahead of its time, is not sensing the same with its recent tumbles?
Recession? Where? Only in forecasts that do not come true
Doubts exist. They have been with us for years. The stock market predicted with its 2022 bear market a recession that did not occur. The basket of leading indicators maintained its prediction until last year (and is still retreating today). The Treasury bond yield curve is even more recalcitrant (although its slope is now beginning to retract). The Sahm rule, which Dudley invokes, is not a forecast. It is a shortcut to obtain early confirmation.Are we then on the verge of a recession? Nothing better than inspecting the suspect. The stock market plunged on Wednesday, and revived on Thursday and Friday. What happened? The economy presented impeccable credentials. In the second quarter, it grew by 2.8% (one point above the potential rate at full employment). Final demand from the domestic private sector, 2.6%. Private consumption, 2.3%. Fixed investment, 3.6%. Imports, 6.9%. Recession? Where? Only in forecasts that are not met. The Sahm rule points out the rise in unemployment. At the same time, employment, which is what pulls the cart, does not stop. Inflation, on Friday, measured by the deflator of personal consumption for June put the finishing touch: 2.5% year-on-year. The navigation proceeds smoothly. It is true, there may be occasional complications. But it is not an emergency. Not at all. The FED will lower rates in September because its policy is restrictive and prevention is better than cure.
The stock market is confident of a successful landing, and is also putting a damper on the fever for technology. Rotation is the solution at hand. The bull market is not in the spotlight. This is not a correction, because if it were, the mid-range stocks would have no chance. It is a purge of excesses. During the week, the Nasdaq fell 2%. The S&P 500, 0.83%. Small caps – the Russell 2000 – grew 3.5%. It’s the economy, stupid. And no longer the fad of the moment. Last month, the Nasdaq fell 3.5%. ETFs for mid-sized company stocks rose 5.6% and those for small firms, 12%. The bull market changed its mount. Artificial intelligence and technology unsaddled. The stock market will cope with the healthy real economy, obedient inflation and the promise of an upcoming rate cut that clears the way forward.
Source: Ambito
