The good news for stocks it that the data’s bad.
How many times have we seen that movie before post-GFC? (A lot.)
Bad news is good new for risk (or at least can be good news), as long as it’s not too bad. That’s particularly true when risk is expensive, as it is now.
There’s the chart. Amusingly, 22x is actually “in the ballpark of fair value,” according to Goldman’s model, despite counting as 96%ile on a 45-year lookback.
When you need to justify nosebleed valuations (like, say, SPX trading ~100%ile on a forward multiple) there’s nothing quite like rate cuts. And the cuts are comin’ thanks in part to a run of disconcerting labor market data.
“The market was prepared for a CPI upside surprise as the possible equities pullback catalyst this week, but the perverse thing was that the CPI components which feed into core PCE estimates” actually tipped a lower print for that oh-so-crucial Fed input, Nomura’s Charlie McElligott wrote, on the way to describing the (Texas-driven) surge in initial claims and Friday’s lackluster consumer sentiment readout as a “double dovish whammy” for Fed expectations.
The figures above, with McElligott’s annotation, give you a sense of how acute and pervasive the jobs misses are becoming. Thursday’s claims upside, fluke or not, was a near seven-sigma event.
Markets, McElligott went on, have “shifted to nearly a full embrace of three cuts by year-end,” a further dovish inflection which saw stocks “‘trading short’ and squeezing higher” this week helped along, of course, by Oracle’s report which spoke rather loudly to the idea that AI demand remains “insatiable.”
The risk now, I suppose, is that even if a half-point move from the Fed next week isn’t the official “base case” on Wall Street, and even if market pricing still skews in favor of a 25bps move, the unofficial consensus is for a 50bps cut.
If the FOMC fails to deliver, opting instead for a “regular” quarter-point move with no dovish dissents, markets could worry the Committee’s insufficiently concerned about the jobs market.
H said well when he described the market as a “perpetual motion machine” in the comments section of another article. Valuations don’t matter. At all. Algos and lots of money, guided by the current silver bullet–flood 0DTEs, rotate among MAG7, and sell vol. It’ll be ugly when it heads the other way, but the FOMO frenzy may be just beginning.
I’m self-diagnosing TDS after seeing the dominant red state in the country just deliver an anomalous employment collapse hot on the heels of directly undermining representative little d democracy with their mid-decade rediscriminating, er redistricting.