The US stocks are trying to move higher. The Dow was up close to 600 points and the NASDAQ was up over 200 points at the highs today, but have given up a lot of those gains with the Dow near unchanged and the NASDAQ down -35 points.
The gains today came despite the stronger jobs report which showed 261,000 new jobs this month and 52,000 increase from last month. That’s over 300 K for the month. The unemployment rate is still at 3.7%. This is higher than 3.5% but not by much (historic low levels).
In certain times, strong employment is indeed a good thing and should be a good thing for stocks, but in the current environment where inflation is economic and publinc enemy #1, tighter labor is not a good thing.
The infrastructure build will continue to keep mega construction going especially in chip sector. In addition, car manufactures will have to build their EV cars in the US if they are to qualify for rebates to buyers. Cars built outside the US will not get that advantage. Do car manufacturers want to lose sales because they don’t build in the US and their cars cost more to the consumer? I don’t think so.
Big manufacturing is the new tech sector. IN a time where workers are scarce, that is not good for employment costs and in turn inflation. Inflation gets passed on and the more it becomes entrenched the harder it will be to control. This inflation is not like the tech market, however. Technology workers may cost money, but they can be very productive as well. Building a car is building a car.
Yes, higher rates will impact the economy. The Fed has no choice however, as persistently higher inflation will lead to higher unemployment eventually anyway. So kill inflation when the going is good in jobs. Slow growth, get things in balance and rid the markets idea that gains of the last few years are not what the future will be like.
Right now, I think there are those in the market that still think the Fed will pause and it will be rainbows and unicorns again. That stocks will go higher and higher.
IN reality is the Covid induced bubble is bursting.
Covid started it and put things out of whack. Economies shut, supply chains were messed up. People stopped going to work at work, but worked at home. People stayed in and entertained themselves in their homes. Governments and central banks in response created this la-la environement of free money to all man, woman and child. We saw SPACs become a thing and lead to speculation. We saw NFTs become a thing where people paid outrageous amounts for ape digital images.
Crypto, and GameStop and other meme stocks created a false environment where reality was not reality.
Buying stocks was free money.
Buying and flipping house became a thing again.
- Supply chain became a problem
- There was a chip shortage and car price soared
- Free paychecks stopped
- People realize, their gains in housing allow them to retire. The supply of workers fell
- Russia invaded Ukraine
- Energy prices soared.
- Food prices soared.
- Crypto came down
- Gamestop and memes got hammered
- NFTs got hammered
- Stocks go down
- Russia and China become more of a problem then they have ever been
- Businesses react by raising price
We wake up and inflation is in our faces and we can’t do anything about it except by raise rates. However, central banks are so far behind that they hike and hike and hike just to get to neutral.
Then they have to hike more to get to restrictive. All that takes time. It wasn’t until two meetings ago that the Fed got to neutral at 2.5%. Two meetings ago and one of those hikes was just this week that took the rate to 4%.
Now the stock market thinks a rally is around the corner bacause the Fed funds rate is 4%?
I don’t think so.
The Dot.com bubble burst in 2000 and it took until 2002 to 2003 for the bottom to be made. That was 50% lower. The market rallied and got back the declines in 2007 and 2008 until the banking crisis sent the price back down 50+%. IN 2013, the price was able to get back above the 2000 high. That is a long time.
If I am being too alamist? Maybe but it seems a bubble is a bubble and this one is full of inflation issues.
Today’s job report did not help any. Next week’s CPI is still supposed to be 0.6% and 0.5% for the headline and the core. Is that inflation coming down? Should stocks go higher? I don’t think so.
What would help?
I have to revert to my old standby the technicals.
This week, the S&P moved up to test the 100 day MA (blue line in the chart below). The Fed stalled that rally, and the jobs report tried to lead to a bounce today, but that is not working all that well.
Nevertheless, if the market is so smart and predictive, get and stay above the 100 day MA. That is step one for me. Absent that, and there is little that excites me about the road ahead for stocks. There just isn’t a good story fundamentally or technically. The road to the upside is all uphill with inflation sapping the energy.