A ‘prolonged pause’ by the Fed is what most market watchers fret about for the moment; without considering the forthcoming impact of tariffs and many other aspects of the inbound-Administration, that can’t be choreographed in a definitive way, though some aspects are known.Looking ahead we expect a focus on domestic-centric growth more than any actual expansionist moves (aside perhaps regarding Panama); and that’s just because ‘globalism or not’, the reality is a global business economy and most of the S&P’s major components ‘are’ multinational corporations like it or not); it is part of why the market has been choppy and somewhat irresolute.National Security; AI and Quantum, despite some analysts thinking otherwise because they are talking their book (what they’re invested in or selling); and of course efforts to bring more global stability to the world .. fighting inflation too.
Next week’s CPI could correlate with Friday’s higher jobs number, to infer the pushing-out of a rate-cut pause; and ‘if’ that CPI is hence hotter, maybe you’ll get talk about ‘rate hikes’, which doesn’t seem plausible; but a prolonged Fed pause seems reasonable.Hence as noted in my Friday morning ‘X’ post; ‘Jobs was good news is bad news’ in a sense; while of course there’s no recession in sight; but headwinds for all sectors looking for relief from lower interest rates. Note that 33,000 of the new Jobs was Government hiring; which should not be happening in the age of AI, and the ability to contain and reduce labor-intensive work by bureaucrats.Market X-ray: There is more uncertainty about monetary policy; and there is a vacillating concern about the extent to which DOGE (the Musk-Trump alliance) will effectively be able to trim Government spending (somehow they will). The rate picture may ‘then’ appear to be more conducive to decline; hence traders (and bond vigilantes) shouldn’t make too much of Friday’s higher Jobs data.Anything that reflects prices, Jobs and even tariffs, matters for economics that will ‘actually’ occur; which are likely to be considerably at-variance from these superficial data reports. So that sets up a volatile year in Treasuries too; and it is not so simple as looking at these individual data-points for prolonged clues.Core PCE data has shown the continued upticks in ‘inflation’ as I again have contended all through the past year; as a slower pace of higher prices; not a trend toward declining prices. We’ll see if that rising pattern continues with the tariffs forthcoming; or whether restraint will prevail in punitive or simply newer economic policies too (which are intended to boost domestic USA growth).Is there evidence of the economy overheating based on the Jobs number? No is my answer because Employment is actually stabilized aside higher growth in Government Jobs (and Healthcare somewhat), which generally isn’t ‘core’. Of course Oil prices are also moving higher, and though considered not ‘core’, in my view nothing is more basic (or core) that Food and Energy prices.For now the ‘de-inverting of the yield curve’ relates to tariff expectations too. I think the bottom line I’m saying is ‘don’t over-agitate over the Jobs number’.
Meanwhile . . it’s a low-conviction time in the market; with excess focus on data; although sets-the-seeds for a growth scare down the road. It’s not a ‘game-over’ situation; which actually was late last year for mega-caps; and small-caps are more impacted (beyond logic) by forward interest rate fears.Most of those aren’t particularly warranted; and might even be offset by ‘tax cuts’ if you think about what’s ‘presumably’ forthcoming in the new Trump era. Of course ‘presumably’ is the key word and that’s why it has people on edge.Also the primary uptrend has had trouble breaking for S&P; and has been the expectation on our part for some time – you can see where support might be. It doesn’t seem comforting to investors, but having this kind of pressure prior to Inauguration ‘is’ the preferred pattern rather than ‘stretching a rubber band’ to the serious snapping point, which had they pulled S&P higher into Trump 2 Inauguration; that would enhance a rougher ‘uncorrected’ February pattern. It isn’t very comforting, and we like have a bit more to go; but preferred pattern.
Plus I believe the California catastrophe ‘does’ weigh on the markets. Fiscally responsible rebuilding will be almost impossible in some burned locales (such as Palisades hillsides); because building codes (not just Coastal Commission hassles) and lack of lending and insuring such properties won’t be possible in many cases. That may be doubly so for the rows of oceanfront Malibu homes (ocean side of PCH) were already on borrowed time. Expensive; already were victims of fires (recall Pepperdine Univ. area fire down to the sea) as we sure is the case with Topanga Canyon multiples times.This was the worst; and sure, there will be ‘full-cash risk-takers’; but generally a lot of rebuilding won’t occur, just because the unfortunate victims will put on a brave-face about it. (Olympics 2028 will be part of that; and perhaps LA will be on-display by then … we’ll see.) Remember Pete Wilson? He was Gov’nor of California about 25 years ago and wanted larger reservoirs to handle fire risk. That topic came up 5 years ago too. What happened? Nothing. Notice a rise is media and even politician push-back against soft-pedaling the lack of a proper preparation for the fire emergency? Will California politics revert back to what for many people were times of joy & prosperity; not focused on bling?Fire was the event this week; not just Jobs number or earnings expectations. I hope the economy is as strong as many believe; because it will need to be. At the same time, if/as the so-called ‘liquidity trade’ is over and S&P corrects; prospects of Californians who just lost their home also taking market hits; all sadly can combine. Ideally we get a bit more washout (with margin liquidation related to leveraged players in AI/Quantum etc.), and then a turn higher (very ironically led by. AI and Quantum, especially with both D-Wave and Rigetti now confirmed as hosting ‘fireside chats’ during a Needham Tech. conference on Tuesday. Hard to say if there will be much follow-through but it should note an end to the post-Jensen (Nvidia) sideswipe attack that was very inaccurate.Bottom line: there is not real economic overheating now; there is correction in S&P and more ahead of President Trump’s Inauguration; and that’s likely a favorable situation ‘if’ you believe it preferable to contract the stretched big-cap market (‘Magnificent Seven’ +) now; and attempt to rally again thereafter.Most of the talk that seemingly ‘undermines’ the bullish long-term structure is of course troubling; except I am not overwhelmed by the Jobs number. and as that includes the ‘Government’ hiring. I don’t see all this as signs of much changing; and an explanation for big-caps to adjust / correct, which is something that was pending anyway.
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