While the daily close in New York was higher and seemingly reassuring, in fact, the market had been a lot higher and savagely rejected an extended intra-day peak.
Such price action is often indicative of a reversal moment.
One swallow less does not a winter make, but it is difficult to see how the market could get any more excited than it has been over the past 24 hours. This impressive acceleration came on top of an already historic January.
Even if still a bull market, it must be getting tired. The price action on the day, even with that higher close, did suggest this.
US New Jobless claims continued to decline, which empowers the Federal Reserve to keep hiking. Just as it has said it will another two times at least.
At the same time, job layoffs increased sharply. Hence, we have a situation of economic concern, yet an argument for a strong labor market.
All through last year I kept saying not to look at the jobs data for a read on the economy. In other words, we had a recession with seemingly strong employment, and we could well do so again this year.
What the recession deniers do not want to talk about is that there are currently 2.6 million fewer people working in the US economy than before covid. People left and did not come back. This is why the employment data looks so dysfunctional even though it is strong, and the US is headed into its second recession in two years.
The US economy grew at about 1% last year. Yes, Q3, Q4 was much stronger, but the December/January monthly data is very clearly pointing to recession. Manufacturing and Services are currently both in contraction according to the official data and job layoffs are beginning to spike again.
At the same time, the Fed will most definitely be hiking rates another two times to at least 5.25% this year. Perhaps another 4 times to 5.75% should inflation re-accelerate which is surprising to most an actual possibility. The futures markets have been pricing in a 50-point rate decline by year-end from where we now are. The reality is likely to be 100 to 150 points higher.
What we are actually seeing in the stock market is a serious episode of greed and exuberance. It is just that it’s from within a giant correction period, rather than the typical extending to new highs type of over-exuberance we had become accustomed to over recent decades.
The end result will be the same. A far too optimistic market sentiment seeking out its full stretch potential away from the reality of a still weakening economy, which may not recover for several years rather than months, and an environment of rising prices and ever higher interest rates.
A lot of people are now long, not realising they have just become a sea of potential sellers.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
