Weak Jobs Data Trap Wall Street Bears
The market refuses to embrace the argument that Trump's economic policies will fail.
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Wall Street bears were breathing a sigh of relief on Friday when negative revisions to several months of employment data sent the indexes to their worst performance in a month. With technical conditions extended, it looked like the start of a deeper correction.
After digesting the news over the weekend, investors focused on the positive ramifications of the weaker-than-expected jobs news — it will push the Fed to finally deliver the interest rate cuts that President Trump and many investors have been hoping for.
Early on Tuesday morning, Fed Fund futures indicate an 88% chance of a quarter-point cut at the meeting on September 17, a 60% chance of another quarter-point cut on October 29, and a 47% chance of a third cut on December 10.
The odds can change quickly as more economic data are released in the months ahead, but unless there is a massive surge in inflation, the Fed will be under extreme pressure to cut rates to deal with weak unemployment.
The economic bears remain convinced that tariffs will spike inflationary pressure, potentially leading to a stagflation scenario if employment also weakens. This has been the bears' base case for most of the year, but they have been trapped by this dire prediction numerous times, which keeps sending the indexes to new highs.
Will the bears finally be right about an economic disaster due to Trump's policies? Maybe, but the market appears to think otherwise, and that is what the strength on Monday was all about. Even if there is economic slowing and some increased inflation, the Fed will support the market with more dovish policy.
While the market still has the issue of overbought technical conditions, the sharp dip on Friday relieved some of the pressure and set a clear support level for the S&P 500 around 6200. As long as that holds, the market can build a new foundation to support further upside and a test of the recent highs around 6425.
We are heading into the seasonally weakest period of the year, which will likely produce some choppy action, but watch for rotation. The Russell 2000 IWM is seeing relative strength and may appeal to investors who are looking for better charts and less extreme valuations.
We have a positive open on the way. President Trump is scheduled to appear on CNBC this morning at 8 a.m. ET.
At the time of publication, Rev Shark had no positions in any securities mentioned.
