What's going on in Wall Street?
The main narrative in the financial press lately has centred around fears of a hard landing for the U.S. economy, drifting further away from the much-desired soft landing that Mr. Powell has been aiming for.
Recent employment data, weaker than expected, has only fueled the fire that was ignited on July 11. That day, after an excellent inflation report, out of nowhere, came the fear of a possible recession.
Just as the plane was gently touching down on the runway, market sentiment suddenly flipped.
The seasoned investor, a loyal follower of Elon Musk and swayed by dubious financial influencers, watched as the biggest stock market fear of the past two years seemed to fade under the hawkish grip of the Fed. Yet, despite the positive signals, the market was bleeding, and confusion continued to grow.
Unsettling, but not terrifying
The media’s narrative began to sink in just as quarterly earnings reports from some companies were looming. To the sceptical eye of the financial press, these results failed to justify the high growth expectations that current valuation multiples suggested.
In this context, with whispers of a possible first rate cut in the US, Japan decided to raise interest rates by 0.15%, which caused the Japanese stock market to plummet by 20%.
Two days later, disappointing non-farm payroll data was released, and rumours started swirling about the challenges of monetising artificial intelligence (AI) and the hefty CAPEX requirements for its development.
This scenario would scare even Warren Buffet—if any of these fears were actually based on solid ground. But they're not.
First, the end of the inflation battle is a pivotal achievement on the path to economic stability, giving the Fed more tools to support the economy if needed. That’s undoubtedly excellent news.
Second, after the wild growth of the last two years, it’s only natural that companies need to adapt to slower revenue growth and shrinking margins. Adjusting demand to more sustainable levels is both logical and necessary.
As for Japan, while there’s talk of a carry trade effect due to a potential trend shift between the yen and the dollar, it’s naive to think that financial institutions were blindsided by a minor rate hike, causing markets to tumble.
The Bank of Japan had clearly signalled its intentions throughout 2024. Besides, Tokyo isn’t thrilled with domestic demand, so a 0.15% hike is merely a slight adjustment, waiting to see how the Japanese economy reacts.
And let’s not forget, the latest non-farm payroll data is just as bad as the one that markets openly celebrated in late April. But back then, inflation was the star of the show. Recession fears had to ride the bench.
Finally, the challenges of monetising AI and the high CAPEX demands for companies developing it shouldn’t come as a shock at this stage of the game.
In summary, while the headlines might seem unsettling, none of these concerns have enough substance to cause real terror. It's all part of the broader market narrative adjusting to the post-pandemic economic reality.
So, why did the markets drop?
It’s crucial to understand that market sentiment plays a significant role in short-term market movements, often overshadowing the underlying fundamentals. It’s no surprise, then, that stock markets experience corrections when fears and uncertainties surface.
The correction tends to be more severe when valuations are well above their usual averages, which was precisely the case here. However, this doesn’t mean we should abandon objective analysis. The key is to determine whether the short-term sentiment will persist or if the fundamentals will reassert themselves.
From our analysis, we can conclude that this was a healthy correction, exacerbated by media hype and accompanied by a slight rotation into bonds, which tend to become more attractive in an environment of falling interest rates.
Following the stock market shakeup, the US market regained much of its lost value in just two weeks, buoyed by the best retail sales data since January 2023 and a slight uptick in core inflation to 3.2%. It’s worth noting, though, that housing prices will need to keep cooling if interest rates are to continue falling next year. It’s surprising this isn’t being mentioned more frequently, even though it’s not a pressing concern at the moment.
Everything seemed to be on track until August 21, when the non-farm payroll data from the last 12 months was revised, revealing that 30% of those jobs never existed. Fears resurfaced, and investors began asking: "What’s next? Is a major recession looming?"
The U.S. Economy and Media Manipulation
Despite the fiscal and monetary "doping" the U.S. economy has undergone—and the subsequent hangover—it has remained resilient, supported by a strong labour market and available savings. Not only does it appear ready to ease monetary tightening, but the timing aligns almost perfectly with the drop in employment figures, reinforcing the likelihood of an interest rate cut.
Meanwhile, Jerome Powell, unbothered by market fluctuations, seems confident that the battle against inflation has come to an end. He hinted at upcoming rate cuts and delivered a reassuring message, noting that employment data is only starting to show a slight downward trend.
This contrast between economic strength and market volatility brings into focus the role of the media. Often, they fuel fear or greed, clouding the overall picture.
Unemployment remains near historic lows (4.2%), private debt levels aren’t alarming, and housing prices are beginning to slowly cool off. Yet, some journalists and second-rate YouTubers seize any excuse—whether it’s the yield curve inversion or war rumours—to stir up panic. The only thing that matters? The click.
Short- and Medium-Term Risks in the U.S. Economy
In the medium to long term, risks arise from the expansive fiscal policies adopted in the West, geopolitical tensions, and the increasing global demand. These three trends create inflationary pressures.
If such pressures materialise, governments might be forced to curb monetary expansion, which could in turn limit future economic growth.
However, technological advances, productive competition, and the stabilisation of supply chains serve as counterweights, driving growth forward. These forces provide a balancing act that could mitigate some of the negative effects of inflationary pressures.
Of course, each of these factors deserves careful examination, and we’ll dive into them more deeply in future posts on this blog. For now, it’s enough to highlight that there are not only risks but also solid reasons for optimism.
In the short term, the risks appear limited, and the recent signs of economic slowdown do not pose a serious threat to the U.S. economy, which has shown remarkable resilience in the face of challenges. No matter what inflation data comes out or who ends up in the White House in November, investors in Uncle Sam’s backyard can rest easy.
How should we approach the coming weeks?
We often obsess over economic indicators that, time and again, offer erratic explanations for market movements. It’s not the inflation or employment figures themselves that dictate market direction, but rather the market sentiment born from how these figures are interpreted.
That said, taking advantage of the market’s temporary irrationality requires an understanding of its quirks and whims. Some might call it market manipulation—whether by Blackrock, the Masons, or even the Minions. Honestly, we couldn’t care less. For us, it’s simply temporary irrationality, and if the market keeps falling, we can use it to our advantage.
On the flip side, it’s essential to conduct thorough analysis on any asset we’re considering, tapping into the vast amount of data available at the click of a button.
This way, we can align the long-term bullish sentiment with a short-term irrational drop, and be well-prepared when opportunity strikes.
Meanwhile, key developments like technological advances, the rise of alternative economic blocs challenging U.S. dominance, and the growth of social media are reshaping the global socio-economic paradigm. Understanding and integrating these elements into our analytical models is crucial for drawing valuable conclusions.
Furthermore, productivity, rising global demand, geopolitical tensions, energy resource management, and demographic slowdowns deserve in-depth and objective analysis, as they directly influence how we assess long-term economic indicators.
This blog aims to unravel the complexities of financial markets, delving into the science and philosophy behind them. Our goal is to exploit market inefficiencies and formulate high-value investment theses.
So, the plan? Stay sharp, leverage irrationality, and keep doing your homework.
I.L.R.