Stocks Decline After June Jobs Report Beats Estimates

Stocks Decline - Fall On Solid BLS Report

Stocks Decline even though the BLS report was strong. Friday’s action was very interesting because the BLS report beat estimates. But stocks fell because the odds of a rate cuts fell.

The market had been back to hoping the Fed would save it. I actually think the situation is a win-win for stocks. Either the economy recovers and doesn’t need rate cuts or it falters and the Fed cuts rates. I’d rather the former. There is no guarantee the Fed will solve the economy’s problems with a couple rate cuts.

If the economy is weakening because of the trade war with China, a rate cut can’t solve the issue. I’m not sure what issue a rate cut solves because financial conditions are loose. A counterpoint to that is financial conditions are loose. Fed is expected to cut rates multiple times this year.

It's noteworthy that stocks barely fell and the Russell 2000 actually rallied.

Stocks Decline - So it’s not as if stocks were crushed by the idea of a stronger economy and fewer rate cuts. That’s why I say both situations are a win.

Three terrible situations that would send stock lower are inflation spiking, a deeper slowdown, and an all-out trade war. If the options are a modest slowdown or an end to the slowdown, there isn’t a losing choice.

The economy is far from a recession and far from having high inflation. With President Trump negotiating with Xi, there is little worry about an all-out trade war in the next few weeks.

The market doesn’t need a trade deal to be made soon. It just wants to avoid a situation where tensions escalate. Those predicting a real war are way too overzealous. That’s a very low probability event.

Stocks Decline - Details Of Friday’s Action

It’s not like stocks collapsed on Friday. S&P 500 fell 0.18%, Nasdaq fell 0.1%, and Russell 2000 rose 0.22%. I’m phrasing my statement like that because there was negative chatter about the fact that stocks rallied after a good jobs report.

It’s possibly because of the cynicism that some have towards the Fed. There would be the same reaction if stocks rallied on a bad report. The sweet spot would have been if it met estimates.

It would be weak enough for multiple rate cuts and strong enough for investors to not seriously fear a recession. I don’t have cynicism.

We aren’t trying to make political points. We are trying to make money. There’s room for politics in your life. But not while you are trading and investing.

VIX rose a substantial 5.65% to 13.28.

Stocks Decline - That’s a large percentage move for a slightly down day. That’s probably because the VIX started the day with a 12 handle which is historically low.

CNN fear and greed index only fell 1 point to 61 which is greed. There is reason to be careful with stocks. They are elevated and traders have started to get greedy.

There were more bulls than bears in the AAII investor sentiment poll. This ended the 7 week streak of bears being more prevalent than bulls. It’s notable that stocks probably fell partially because they were frothy. The lower chance of rate cuts isn’t the only factor in play.

No Double Rate Cut In June

Stocks Decline - Speaking of froth, there has been a huge amount of it in the treasury market as fund managers called it the most crowded trade in June. There was a major selloff in treasuries on Friday.

2 year yield rose 10 basis points to 1.86%. 10 year yield rose 8 basis points to 2.03%. 2 year yield likely rose more than the 10 year yield. Jobs report has a greater impact on Fed policy than it does on investors’ view on the economy.

The report above shows 224,000 new jobs added. This jobs report makes it impossible for the Fed to cut rates 50 basis points in July and lowers the odds of 3 cuts this year.

On the other hand, this report simply means the economy isn’t weakening as quickly as some thought. I’m not willing to say the slowdown is over because of one solid jobs report.

We need to see improvements in other reports such as industrial production, retail sales, and durable goods orders. Difference between the 10 year yield and the 2 year yield is still 17 basis points. But it’s worth watching in the next few months to see if the gap closes.

Stocks Decline - It’s notable that financials rallied 0.38% and utilities fell 0.17% because of the selloff in treasuries.

Utilities have far to fall if yields keep rising. I’m not saying they will though because I’m not sold on the slowdown being over. The gap between the 10 year and 2 year yield can close though because less rate hikes are coming.

The argument for 2 cuts this year has grown stronger. Specifically, the chance of a 50 basis point cut in July is just 4.9%; it was 32.3% on June 28th.

Odds of at least 3 rate cuts in 2019 have fallen from 59% on June 28th to just 45.6%. One cut in July makes 3 cuts this year less likely and that appears to be what will occur.

Stocks Decline - Conclusion

In a future article, I will go into detail on what the June jobs report means for the economy. This article was all about what it means for markets. As you can tell, it had a huge impact on them.

Jobs beat makes rate cuts less likely and caused treasuries to sell off sharply and stocks to sell off slightly. Specifically, in June there were 224,000 jobs created which beat estimates for 165,000.

This doesn’t suddenly mean the slowdown is over. But it means the consumer might get stronger. Odds of a recession this year definitely fell. Either way, Q2 GDP growth has above a 50% chance of being below 2%.

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