1. Moving the markets

It was a tough Tuesday for stocks as they started the week with a drop, dragged down by rising oil prices. Saudi Arabia decided to keep cutting its oil production by 1 million barrels per day, pushing the West Texas Intermediate futures above $87 per barrel, the highest since November. That’s gotta hurt!

Meanwhile, Treasury yields also jumped, putting pressure on risk assets. The 10-year yield soared by more than 8 basis points to 4.258%.

Goldman Sachs tried to cheer up the market by lowering its recession odds to 15% and predicting that the Fed will skip a rate hike this month. But who are they kidding? September is usually a bad month for stocks, and investors know it.

Some traders are still hopeful that this year will be different, thanks to the bullish momentum. But history is not on their side.

Factory orders fell less than expected in July, down 2.1% versus a forecast of 2.3%. That’s not much of a consolation, though. The Fed still must balance inflation and growth, and rising oil prices won’t make it any easier.

The Fed wants a soft landing, but it could end up crashing. Small and midcap stocks took a big hit, with the S&P SmallCap 600, the S&P MidCap and the Russell 2000 all losing more than 1.8%. Value stocks also suffered their second worst day relative to growth since May.

Homebuilders and short sellers were not spared either, as bond yields spiked and hurt their portfolios. The gap between the 10-year yield and the Nasdaq keeps widening. Higher yields boosted the dollar, which weighed on gold. But don’t forget that gold usually beats stocks in recessions, as this chart shows.

So, what’s next for the market? Will it bounce back or continue to slide? Stay tuned for more updates.

1. Moving the markets

The stock market had a roller-coaster ride on Thursday, as an early rally fizzled out and left only the Nasdaq in the green. The other two major indexes closed slightly lower, snapping a 4-day winning streak. The month of August was a bumpy one for stocks, as the S&P 500 trimmed its losses from nearly 5% to less than 2%. Small caps suffered the most, as they usually do in turbulent times.

Inflation remained a hot topic, as the Fed’s preferred measure, the Core PCE Deflator, rose to 4.2% year-over-year in July, matching expectations but higher than June’s 4.1%. The headline PCE also jumped to 3.3%, the highest since June 2022. But if you take out the housing component, which accounts for a large chunk of consumer spending, inflation is still stuck at elevated levels, as this chart shows.

Bond yields were initially falling, which boosted stocks, but then reversed course and started to climb, which dragged stocks down. It seems that stocks are following bonds closely these days, so lower yields could mean higher stock prices in the near term.

The labor market showed mixed signals, as initial jobless claims dropped to 2023 lows despite a surge in layoffs, but continuing claims rose above 1.7 million last week. The economic recovery seems to have hit a speed bump in August, as various indicators showed the biggest monthly decline since May 2022. The data was also inconsistent, with some measures showing strength and others showing weakness.

The dollar had a strong month, rising the most since February, but has been trading sideways for the last two weeks. The Fed has been talking tough about tapering and hiking rates, but the market is not buying it. The market is pricing in 1.1% of rate cuts by the end of next year, which could be a big mistake if the Fed follows through on its hawkish rhetoric.

The bottom line is that the market is facing a lot of uncertainty and volatility, and we need to be prepared for more swings ahead.

1. Moving the markets

The stock market seems to be living in a paradox these days. Weak economic data, which usually spells trouble for equities, has been boosting them instead. Why? Because investors are hoping that the Fed will ease its monetary policy in response to the slowdown.

On Wednesday, traders got another dose of bad news. ADP reported that private employers added only 177k jobs in August, much lower than the revised 371k in July. This signaled a cooling off in the labor market and lowered the expectations of a rate hike.

Meanwhile, the annual GDP growth rate was also revised down to 2.1% from 2.4%, adding to the gloomy picture of the economy.

This was the second day in a row that investors shrugged off poor economic data and pushed stocks higher. On Tuesday, the major U.S. indexes rallied after disappointing consumer confidence figures and a sharp drop in job openings for July. This sparked hope that the Fed could be more dovish in its upcoming meetings.

Some analysts call this a ‘bad news is good news’ environment, which tends to happen when investors are worried about rates and Fed policy. Any softness in economic data reduces the upward pressure on yields, and that helps equities.

But this paradoxical situation may not last long, as Bloomberg’s Simon White noted. He pointed out the divergence between the S&P 500 index and the Leading Economic Index, which measures future economic activity. The S&P 500 has been rising while the LEI has been falling, suggesting that stocks are out of sync with the recession risks.

The bond market also showed signs of volatility, as yields swung wildly but closed lower on Wednesday. The dollar weakened again, giving a boost to gold prices.

So, what does this all mean for us trend followers?

It means that we need to be cautious and prepared for any surprises. The market may be enjoying the bad news for now, but it may not be able to ignore reality for long.