Friday’s cooler than expected jobs report could mean the markets are at a critical juncture in determining the future path of returns. From purely a financial market perspective, equities rallied on the notion that October’s jobs added number, which was the 2nd lowest since the COVID recession, would effectively mark the end of the Fed’s rate hiking cycle, an idea that Powell pretty much confirmed at Wednesday’s presser. With central bank pressure now off of Treasury yields, bonds rallied hard and could be beginning the process of shifting from Fed-influenced asset pricing to pricing based on economic conditions. We know that the aggregate of global economic data is trending in the wrong direction and with the Fed now apparently comfortable with letting the yield curve do the tightening work for it, the door may finally be open for the big Treasury rip that I’ve been anticipating for months. Long bonds are having one of their best calendar weeks of the past three years, which indicates that there’s a lot of pent-up demand here for the traditional safe haven trade.
While the huge gains in the major equity averages would suggest a strong risk-on pivot during the second half of the week, the underlying landscape is a little more mixed. Utilities nearly outperformed the S&P 500 this past week and value stocks, which tend to have a bit more of a defensive tilt, nearly kept pace with the broader market as well. Lumber prices also gained relatively little compared to what might be expected in a strong risk asset rally. I don’t think there’s any question that the markets were waiting for the eventual Fed pivot (if that is indeed what this is) and the markets reacted accordingly, but I wonder if this rally has legs.
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