The August payroll data was greeted with chants of “Goldilocks” for being neither too hot nor too cold. Investors, however, forgot that “Goldilocks and the Three Bears” didn’t really have a happy ending.
It’s easy to see why the markets initially celebrated the report. While the U.S. economy added 315,000 jobs in August, slightly more than the 300,000 economists had predicted, the jobless rate and the number of people who decided it was time to start looking for a job both increased, and wages increased at a slower rate. faster pace than expected – perhaps just enough for the Federal Reserve to slow the pace of rate hikes. That’s how the stock market initially treated it on Friday, with the
Dow Jones Industrial Average,
all trading up more than 1% early in the day.
The gains turned into losses, however, as the markets seemed to realize that they might have gotten ahead of themselves. Job creation, while slowing, has only fallen from extremely high levels – more than 300,000 new positions would be considered solid under most circumstances – and wages continue to rise at a 5.2 rate. %.
“As a result, the door is still wide open for the Fed to keep moving forward, and we also believe that retains the potential for a 75 basis point rate. [0.75%] upside at the September meeting still on the table,” writes Rick Rieder, BlackRock’s Chief Investment Officer for Global Fixed Income.
As a result, the Dow Jones ended the week down 964.96 points, or 3%, while the S&P 500 fell 3.3% and the Nasdaq Composite fell 4.2%.
It was the S&P 500’s third consecutive weekly decline since it unsuccessfully attempted to retake its 200-day moving average at what turned out to be the high point of the summer rally. This does not bode well for the near future. The 200-day moving average, now near 4290, has been down for 90 straight days, notes Dean Christians, senior research analyst at Sundial Capital Research.
This has happened 23 other times since the start of 1930, and the S&P 500 has fallen an average of 5.8% in the six months following the 90-day mark, while rising only 30% of the time. “The S&P 500 remains mired in an established downtrend, suggesting a potentially unfavorable outcome,” Christians wrote.
It’s not just the Fed’s potential rate hikes that could be a problem. The central bank is set to accelerate the reduction of its balance sheet, a process known as quantitative tightening, as it continues to normalize US monetary conditions.
The importance of this should not be underestimated, says Solomon Tadesse, head of North American quantitative equity strategies at Societe Generale. He estimates that the reduction in the balance sheet would be equivalent to a rate hike of 4.5 percentage points – in addition to a maximum federal funds rate of 4.5%, a rather massive tightening. This could rattle stocks like in 2018, when quantitative tightening, not rate hikes, caused a selloff in December that forced the Federal Reserve to turn to rate cuts in early 2019. QT, this times on a larger scale to erode a much larger balance sheet, it could surprise markets,” writes Tadesse.
That’s the problem when you’re in a bear’s house.
Write to Ben Levisohn at Ben.Levisohn@barrons.com