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A surprisingly resilient US economy is once again leading stocks higher: Morning Brief

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2 months ago

October 8, 2024

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A surprisingly resilient US economy is once again leading stocks higher: Morning Brief

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The better-than-expected September jobs report put an exclamation point on a trend that’s been underway for the better part of two months now.

US growth data is once again surprising to the upside.

“Forget soft landing, maybe we’re having no landing,” Interactive Brokers chief market strategist Steve Sosnick told Yahoo Finance. “That’s what this jobs report may be telling us.”

For investors who have closely followed the economic narrative over the past several years, this should all feel a bit familiar. Just as consensus believed the US economy was finally slowing to the point where it needed help from the Federal Reserve, the data says otherwise. Escalating fears of a “hard landing,” where the Fed’s restrictive interest rates send the economy into a tailspin, have quickly moved to discussion about a “no landing,” where the economy keeps growing and inflation risks once again emerge.

This brings to mind the defining phrase of the surprisingly strong 2023 economy and all the caveats that come with it.

Indeed, we are, once again, so back. Back to a time headlined by calls for strength in the stock market as the Fed cuts interest rates while the economy remains on solid footing. Back to a time when good economic news is “good news” for stocks.

But it’s a delicate balance. Too much strength could mean once again seeing good news framed as the precursor to an inflation rebound. As our Chart of Day shows, there have been plenty of moments over the last year alone where markets have been rooting for data to cool off. At times, data that’s come in weaker than expectations has been cheered by investors fearful of another spike in inflation and interest rates staying higher for longer than initially hoped.

Markets appear to be wrestling with what the narrative shift means. After initially rallying nearly 1% on Friday after the jobs report, the S&P 500 was off nearly 1% on Monday. This comes as the 10-year Treasury yield (^TNX) added about 20 basis points over the past two sessions to breach 4% for the first time since August.

This move in yields represents how market participants are now adjusting to expect fewer interest rate cuts from the Fed as the economy holds steady. A week ago, investors were pricing in a 34% chance that the Fed would cut interest rates by another half a percentage point in November, per the CME FedWatch Tool. As of Monday, investors were pricing no chance of a jumbo-size cut and instead giving a 15% chance to the Fed not moving rates at all.

For now, this seems to be acceptable for equity investors. Bank of America US and Canada equity strategist Ohsung Kwon noted that further good economic news could be welcomed by investors “as long as inflation remains in check.” At some point, though, the move higher on yields could weigh on investor appetite for risk in the stock market.

“If the data continue to improve, long-term rates and commodity prices are likely headed higher, which could put a strain on stocks without [earnings per share],” Piper Sandler chief investment strategist Michael Kantrowitz wrote in a note to clients.

Sosnick said the current economic backdrop leads to a “tough setup” for anyone hoping for more interest rate cuts over the next 12 months (yes, we’re looking at you, potential homebuyers).

But on balance, this is an instance to see the forest through the trees. Fewer interest rate cuts because the economy is doing better than everyone thought isn’t a bad thing. If asked to pick between more interest rate cuts or a better economy, Sosnick said he’s “always going to pick the stronger economy.”

He added, “We should always be looking for a stronger economy because that’s really what drives stock prices.”

So, while many things about the economic narrative may be coming back, that framing of rooting for good data to drive corporate profits has never left.