1. Moving the markets

The markets dumped right after the opening as concerns about the economic recovery losing steam went mainstream. No surprise here, as I had mentioned that issue in recent posts and more evidence surfaced this morning.  

Losses accelerated as Japan declared a state of emergency in Tokyo for the upcoming Olympics, and other countries had to deal with a rebound in cases due to Covid variants.

On the economic side, the latest Jobless Data were a downer with the numbers coming in at 373k, higher than expected, and thereby adding to the issue of a slowdown in the labor picture. On the other hand, as I posted yesterday, Job Openings are at a record high, so those without one simply need to get up and apply.

Added one investment advisor:

The market has been in one of those ‘Goldilocks’ stretches when economic growth was accelerating while inflation and interest rates remained low. Increased Covid cases, particularly Delta Variants have caused concerns that the economic acceleration will slow. A few weeks ago, the porridge was too hot, now it seems it is too cold. With markets at all-time highs and some valuations stretched there is little room for economic slowdown in this market.

As a result of a potential slowdown, bond yields continued to slip with the 10-year dropping below the 1.30% level, thereby catching a lot of shorts by surprise. Many pros had bet on rising bond yields and not falling ones. Covering those short positions by buying them back created a vicious cycle by pushing yields even lower.

The US Dollar attempted an early breakout but succumbed to selling and closed lower. Today ended up being opposite day as sinking yields and a slipping dollar combined to give gold a boost mid-day, which unfortunately faded, but the precious metal managed to at least successfully defend its $1,800 marker by closing up a scant +0.06%.

We’ve seen abnormal rides in the markets recently, with the major indexes hanging around all-time high territory. The much hoped for “V” shape economic recovery may have pulled us out of the Covid doldrums from last year, but only thanks to the reckless money creation efforts by the Fed. However, right now it appears that those efforts have hit a brick wall.

After all, artificial stimulation can only do so much before organic growth must take over to create a true recovery. Currently, it’s questionable in my mind whether we are on the right path.

1. Moving the markets

An initial bounce hit a brick wall and turned into a sudden dive with early gains being eradicated in a hurry. But, as we’ve seen many times before, a late morning rally pulled the major indexes out of a deep hole and pushed them back into the green with the Nasdaq lagging and barely reaching its unchanged line.

The S&P 500 touched new record territory but backed off into the close. In defiance of many predictions by “experts,” bond yields continued to tank, as the meme, that “peak economic growth” might have already happened, continued, with the 10-year yield now closing at 1.316%, its lowest level since February 19^th.

On the economic front, we learned that, even though Job Openings hit a new record, there are still some 11 million Americans, who are collecting various pandemic emergency unemployment claims, as ZH indicated. Go figure…

Why did the markets stage a ferocious rebound? While no one has a conclusive answer, ZeroHedge, most likely tongue in cheek, pointed to this graphic explanation.

As big tech rallied early on, SmallCaps were again the loser, while “value” stopped the recent bleeding by just about closing unchanged. The US Dollar was engaged in his own roller coaster ride and ended slightly higher.

Lower bond yields and a fairly stable US Dollar allowed Gold to not only register a second consecutive day of gains, but also reclaim its $1,800 level, although by only a small margin.

I think the elephant in the room continues to be inflation, but more importantly, once acknowledged by the Fed, what will be their plan of action? Right now, they appear to simply let things ride. But for how long?

Be aware that in the initial stages of an inflationary cycle, equities will benefit. But there comes a point in time, when the rug will be pulled out from under them and show that nothing but hot air has supported this bubble.

1. Moving the markets

The bullish move into July hit a brick wall this Tuesday, as some sense of reality set in, namely that all good things must come to an end, such as the S&P’s 7-day winning streak, even if only on a temporary basis. Such was the case today, as the major indexes took a dive right after the opening with only the Nasdaq showing signs of strength, which eventually gave way to bearish sentiment.

Nevertheless, the tech sector held up best, while “value” and SmallCaps were clobbered with especially the former taking the brunt of the beating. After this Holiday weekend, concerns rose that we may have seen the best of the economic recovery and that the future may look less bright.

Supporting that view was the Services Index’s (ISM) data tumbling this morning indicating the potential of stagflation, a period defined of higher prices and no growth. This had a huge effect on bond yields with the 10-year diving below the 1.4% level thereby confirming the much-dread “S” word.  

Added CNBC:

Investors are juggling several signs that the rapid economic growth from the depths of the pandemic could be peaking. The ISM Services index, a major gauge of the services sector, slowed to 60.1 in June from a record in the prior month, data released Tuesday showed. Economists polled by Dow Jones expected a print of 63.5. This follows Friday’s jobs report, which showed the unemployment rate rose back up to 5.9% against the 5.6% expectation.

Amusingly, the always optimistic crowd on Wall Street currently has a year-end consensus target of 4,276 for the S&P 500, which represents an approximate 2% loss from current levels. Huh? But these folks have been wrong before, so this symbolizes nothing but groupthink.

In the end, it was only the Nasdaq, which managed to crawl back above its unchanged line, while the S&P and Dow sported only modest losses after they rebounded off their intra-day lows. Nothing saved SmallCaps and “value.” They simply had a bad day with “growth” clearly coming out on top thanks to crashing bond yields.

Gold had a good day with a +0.79% gain, as the weakness in bond yields overpowered the strength in the US dollar and helped the precious metal to rally but not quite enough to reclaim its $1,800 level.