Expectations Are Getting Disconnected From Reality
Love Dancing Until The Music Stops
The market has mostly become numb to the idea of changing Fed expectations or the possibility of even higher rates this year. The focus on tech and AI has mostly kept investors buying, but this week’s ADP employment report did give the market a jolt, even if it was only temporary (non-farm payrolls came in slightly weaker than expected). At one point on Thursday, the Nasdaq 100 was down more than 1.5%, while small-caps fell by 2.6% before recovering somewhat. It should serve as a good reminder to investors that they shouldn’t just be loading up on risk assets based on enthusiasm about a technology that will take years to develop. The markets are still influenced by current events and fundamentals, even if the market seems to have priced in a 5.25% Fed Funds rate as the base case scenario. Perhaps we have a better chance of a second quarter-point hike later this year, but it was interesting to see the return of fear into the markets even for just a short time.
Within the employment report itself, it’s no surprise that jobs added in the leisure & entertainment space were the driver of the big gains, but it’s worth noting that construction was responsible for nearly 100,000 jobs over the past month. This kind of flies in the face of the notion that manufacturing adjacent industries are having an especially hard time right now. It could present an opportunity for investors since this is one of those areas of the market where expectations are getting disconnected from reality. While the housing market may still be maintaining for longer than expected, there’s little question at this point that the real estate sector, in general, is really struggling. The commercial space, in particular, looks like it’s on the verge of collapsing, but residential housing was trending lower for several months up until recently. A robust home construction market is trying to fill in the gaps of the current housing shortage, but building a lot of new units ahead of what appears to be an imminent real estate market correction doesn’t seem like the wisest play. This is a good example of why it’ll be important to pay attention to both the fundamentals and the long-term view during the 2nd half of this year.
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