Bad News is Good News

Recession Fears are Percolating

Cooling economic data continued to crush oil prices to start the week. The combination of falling oil prices and a slowing economy dragged bonds yields down as well. US 10 year yields have fallen from 4.75% a few weeks ago down to 4.43%. The weak economic data included:

- A miss on ISM Manufacturing PMI
- JOLTS (Job Openings) printed their lowest since February 2001
- Weak ADP Job Numbers
- Weak Chicago Fed Business Activity Index

The Market is Not the Economy

With all of the weak economic data and plunging oil prices, equities must have fallen too, right? Nope! We are in an environment where bad news is good news.

Lower bonds yields means more liquidity and a lower cost of capital. Equities will benefit if this continues at a slow pace. Yes some cyclical areas of the equity market have underperformed but market indexes are doing just fine, especially big-tech stocks.

Microsoft, Nvidia and Apple are now worth more combined than China's stock market.

The US economy is slowing. US mega-caps love it. China’s economy has quintupled in the last two decades and stocks are in the same spot.

The stock market is not the economy!

Recession fears were percolating to start the week until Friday’s jobs number completely changed the narrative.

The May non-farm payrolls number posted a huge beat: 272K vs. an expected 180K.

This is just another reminder that the economy is unlikely to tip-over in rapid fashion. Unless the labor market cracks or bond yields surge higher, recession is still unlikely.

Elsewhere in the world, central banks have started to cut rates! Both the Bank of Canada and the European Central Bank cut interest rates for the first time in 2024. Net-net this is supportive for global growth.

Meanwhile, we had 2 large elections this week. India elections ended with Modi’s ruling party remaining in power. Mexico’s election ended with the ruling Morena party remaining in power. This speaks to 2 emerging market powerhouses staying on a positive trajectory.

Mexico and India are still booming and the Government’s aren’t changing for another term, Canada is cutting rates, and Europe is cutting rates. Recession fears may be percolating in the US, but a global recession is looking LESS likely.

While equity indexes are benefitting from falling bonds yields (despite with weaker economic data) most stocks are actually trading poorly. Breadth is very weak. The percentage of equities outperforming the index is near 1999 levels.

The question is. Does economic data rebound and benefit many stocks that have been lagging or is this 1999 where the last few market leaders finally roll-over?

“Nasdaq just closed at a record high. But there were fewer stocks on that exchange rising to 52-week highs than falling to 52-week lows. This has not happened many times. The handful of times it did were...well.” - Jason Goepfert