A Big Wave is Coming

It may be about to wash over us.

Photo by Silas Baisch on Unsplash

Today’s editorial will brief as this was a surgery day for me. The problem of a one-man operation. So, I’ll just comment on the one thing that reinforces the article I wrote yesterday, titled “Summer Storms Are Arriving.” The theme there was that something is different in the air for the stock market now:

This is that feeling you get before a summer storm—that something is changing in the weather. You’ve been reading about it here from some time, but I think investors in the market are now starting to become aware of it like livestock out in a field, growing uneasy….

You can feel the wind coming down like the cold sweep that precedes a storm. It’s not much movement, but it feels like the economy is cooling now—that it continues to shrink even as inflation seems intent to keep hanging around, holding the Fed’s help at bay. The skies are darkening. The storm clouds are gathering. The air pressure is changing enough that the animals can feel it….

Not everyone sees it, of course, but the herd is getting restless….

Something wicked this way comes.

Zero Hedge had said the same thing—that the US stock market was not responding as it has been for years where bad news was good news because bad news always meant the Fed would be rushing to the rescue with rate cuts. Now the market was responding as if bad news is nothing but bad news—the way things always used to be before the Fed over-involved itself in meddling with the economy.

With rate-cut hopes having moved to where a single rate-cut this year (having once been at six cuts) is about the best anyone is hoping far—barring a full-on recession that would be devastating for stocks anyway—the bad news doesn’t feel so much like a rescue coming as like a recession coming.

Today delivered a reprisal of that with the latest jobs report where numbers are finally turning more sour. It’s not a clear move up in unemployment, as unemployment was not the focus of today’s metrics, but it was a move that showed a lot fewer jobs in the making or being filled. That is the kind of thing the stock market has pounced on again and again, but today it didn’t respond all that much. Even though the bond market responded with yields falling way back, that drop in competition for investors also didn’t lighten the hearts of stock investors that much either.

Economist David Rosenberg summarized the change in sentiment as follows:

"The fact that equities are not responding well to the renewed pullback in Treasury yields … is signaling something important: that stock market investors are also becoming concerned about the economic slowdown and what it means for the earnings outlook."

Stock investors seem more concerned that economic troubles are getting real now and perhaps that the Fed will remain trapped into not delivering any rate cut anytime soon because several Fedheads have said it will take several months of inflation data running the opposite way of the past several months to make them believe the inflation battle is back on track and inflation has returned to falling.

If they hold true on that, the safety net looks like it has some holes in it or may just not be there at all, so the feeling of faster descent in the economy is suddenly real, not just a fiction of whispers about what the Fed might do to juice the economy again.

In just two days time, the 10YR Treasury bond has plunged to its lowest yield in two months, and the yield curve has moved back to a more inverted position. It’s been one LOOOONG period of inversion with inversions being the one of the biggest signs to precede a recession. It could make one wonder if the yield curve, having been so long controlled by the Fed’s biggest bond purchases ever, is just a badly distorted indicator or wonder just how deep is that recession it is predicting going to be?

If you’ve ever been out in the ocean, looking back at shore, and felt the water suddenly go way down around you, you know that means a big wave is rising right behind you, so get ready for it.

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