Friday's Jobs Report Just Became Really Important
Stocks reached a tipping point Tuesday, with inflation data calling into a question a popular theory in this market and bringing to mind one of the ugliest words in economics.
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The market has been ignoring higher interest rates and weak bonds for months, but hot inflationary data on Tuesday was a tipping point for equities. Although the chances of the Fed cutting rates in 2025 have been in freefall, the market hasn't worried too much about it because of optimism about economic growth. The theory has been that a little inflation is the price we will pay for good growth.
That theory was called into question Tuesday when inflation related to services was much higher than expected. The job market has been cooling a bit, but that hasn’t slowed down inflationary pressures. That is a problem and causes contemplation of one of the ugliest words in economics — stagflation.
The jump in interest rates is occurring at the same time as increased worries about economic growth. The economic optimism about the Trump Administration has been cooling, and there are worries about what tariffs will do to the dollar, among other things.
The Fed has been criticized for going ahead with the last rate cut, and it may be pushed into a position where it has to undo it if there is more hot data. This shift on Tuesday is going to make the December jobs news that is due out on Friday even more important.
The positive spin on this action is that the market has been pricing in this downtrend in bonds for a while. This news is not a total surprise, as much of the market is already oversold.
Despite the selling on Tuesday, none of the indexes breached recent lows. Breadth wasn’t terrible at around 2,700 gainers to 6,875 decliners. There were only about 200 new 12-month lows, but only 43% of stocks in the market are over their 200-day simple moving average.
This may be what is needed to bring things to support levels that will act as a foundation for a run into fourth-quarter earnings, but it is far too early to jump to any conclusions. We’ll have to see if there is interest from dip buyers in the days ahead.
This is a tough market to trade right now as it is being driven by macro issues, which renders individual stock picking ineffective. If your favorite stock sold off today, it is likely due to market conditions rather than any change in fundamentals.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
