Weekly Market Prep - 11/6/2023
After last week's big relief rally, will it be stocks or bonds that are able to carry the momentum forward?
Welcome back to ETF Focus! Hope everyone is having a great weekend!
It’s Sunday, so let’s get prepped and ready for the week ahead!
Weekly Market Reset
The markets seems to believe that the long-awaited Fed pivot has arrived. The pressure for a big relief rally in both stocks and bonds has been building up for months and the bulls were finally ready to go to work. But is this a good sign or a bad sign?
Risk assets tend to see a rip when the Fed first makes its pivot, but then fizzles out after a few months. The reason, of course, is that a Fed pivot usually means that the economy is slowing and will soon need a little stimulus, so this could be the very early stages of a “short-term gain, long-term pain” scenario.
The big question is whether the weaker-than-expected jobs report was a one-off miss or a sign that the tight labor market is finally starting to break. The monthly number of jobs added has been trending lower for a while, but not yet to the point that would indicate that the labor market is actually contracting yet. The economy, however, has added fewer than 200,000 jobs in 3 of the past 5 months. It hasn’t posted a single number below that mark since all the way back in late 2020. In addition to that, annualized wage growth slowed to 4.1%, the smallest increase since mid-2021, while the unemployment rate ticked up to its highest level since January 2022 (although at 3.9%, it’s hardly worthy of panicking).
I do believe it’s more likely than not that we’re in the early stages of a labor market reversal, although the markets have thought that before only to be proven wrong. With global PMIs looking deeply concerning on both the services and manufacturing sides, the jobs numbers would certainly seem to be a lagged effect of the slowdown we’re seeing in activity.
That being said, I do think it’s still possible that we’ll get the year-end rally in stocks that many investors are hoping for. The positive psychological effect of a Fed pivot could carry equities higher through the holiday season before resetting and potentially reversing once we enter 2024. The Treasury market will be the more effective signal here. Bonds rallied hard believing that interest rates will be heading lower here and I can’t disagree with the logic. If yields keep moving lower even as stocks rally, I think it’s a long-term bad sign for risk assets because it means that investors are layering on some safety trades at the same time.
Key Economic Reports This Week
Bank of Australia Interest Rate Decision (Monday)
China Inflation Rate (Wednesday)
United States Initial Jobless Claims (Thursday)
United Kingdom Q3 GDP Growth Rate (Friday)
United States UofM November Consumer Sentiment (Friday)
Market Outlook
This week will be much quieter in terms of new economic data, but we will still get another round of Q3 earnings reports. That should largely clear the way for the markets to digest what happened last week and reassess their positions on the economy and the markets. Equities seem to be in the mood to continue rising given last week’s sharp reversal and the three consecutive calendar months of declines just before that. The bond market, however, will be more important for the long-term direction of asset prices.
Last week’s rally in junk bonds and plunge in junk bond spreads were a function of last week’s rally, but if Treasury yields continue to fall this week, I think we need to acknowledge that there’s a flight to safety trade building below the surface. Stocks and bonds are rallying on their own respective catalysts at the moment, but only one will likely come out ahead over the next 6-12 months. My money is still banking on bonds.