Rocky markets: 8 things to know

The one-two punch of a weak Purchasing Manager’s Index (PMI) on Thursday and a weaker-than-expected jobs report on Friday took the market into a tailspin that has now pushed the S&P 500 index 6.5% below its recent all-time high as of August 2.

The CBOE Market Volatility Index (VIX) has gone from dormant to quasi-panic levels in a matter of days, driven not by fears of higher rates (as was the cause during previous wobbles), but fears of recession on top of the churn driven by the market’s internal rotation. Seems overdone to me.

Here are 8 things to know about this week’s market action.

1. The bull market and jobs: Is this the end of the bull market, and is that long-feared recession finally imminent now that the jobless rate is up to 4.3%? I don’t think so, but clearly the jobs market is slowing, as evidenced by both the Job Openings and Labor Turnover Survey (JOLTS) report and Friday’s jobs data. But I think of this more as an unwinding of COVID-era excesses rather than the start of a new downturn.
2. Interest rate cuts: The weak jobs report caused the market to anticipate more rate cuts this year and next. The forward curve has gone from 3.5% (7 rate cuts) to 3.0% (9 rate cuts). The market is now pricing in 3 rate cuts this year.

   The bond market followed suit, with the belly of the curve plummeting. The 5-year yield is now 3.58% and the 5-year TIPS yield is down to 1.76%.

   The 10-year yield has fallen to the same level as earlier this year when expectations for the Fed reached similar levels. The market was premature back then, and my sense is that it’s overreacting again this time, not in terms of timing but the eventual magnitude.

3. The dollar: The decline in yields this week took the dollar down, showing that interest rate differentials still matter for currencies. The weaker dollar today hints that this is not a liquidity event.
4. Volatility: Remember, the odds of a 5% correction are 64%. The market has gone up 60%–70% of the time by an average of 10% per year,¹ but that return comes at a price, in the name of volatility. It’s important to maintain a long-term perspective at times like this.
5. The S&P 500: Despite the sharp rotation in recent weeks, the S&P 500 index remains in an undeniable uptrend, with the majority of stocks above their 200-day moving average.
6. Market rotation: There is no denying that some technical damage has been done here, following what has turned out to be a whipsaw for the broader market. This is especially evident in the Russell 2000, which has gapped down faster than you can say “breakout!” I suspect we are in for a sideways grind into the fall.
7. Earnings: The earnings picture continues to improve, notwithstanding a few visible misses this week. Q2 earnings growth is now up to 12%.
8. Fixed income: Bonds are offering protection again, at least for the moment. They are zigging while equities are zagging.

All in all, I think we will weather this squall, but we may well be in for an extended chop as we enter the seasonally more turbulent period. Stay diversified, and this too shall pass.