“I never had the fear of getting beat, which is how most people lose.” ~ Dan Gable, wrestler and Olympic gold medalist (1972) 

Good evening,

It was a tumultuous week. We saw strong gains during and immediately after a meeting of the Federal Open Markets Committee, to be followed with a sharp Friday sell-off that Fundstrat Head of Research Tom Lee unequivocally described as “ugly.” In addition to sharp declines in equities (all three major indices), we saw the VIX surge to nearly 29 before retreating to end the week around 23 – still highly elevated.

This seems to have been driven in large part by labor-market numbers that some interpreted as foreshadowing a broader economic downturn. For some months now, stock investors have been in a “bad news is good news” regime, but that does not appear to have been the case this week. 

On Wednesday, the Employment Cost Index (ECI) showed that wage growth had cooled in the second quarter, coming in below expectations at 0.9% QoQ. On a YoY basis, the ECI rose 4.1%, the lowest levels since 2021. The ECI numbers were followed on Friday by fresh data showing unemployment rose for the fourth straight month, hitting 4.3%. Nonfarm payrolls for July also came in below expectations at 114,000, a sharp decline from June’s 179,000. 

The cooling labor market is something that Federal Reserve Chair Jerome Powell addressed after Wednesday’s meeting of the Federal Open Market Committee (FOMC). Powell told reporters “we’re watching really carefully for” any signs pointing to a “sharper downturn in the labor market.” He later reiterated that “I would not like to see material further cooling in the labor market.”

Possibly with those remarks in mind, investors greeted Friday’s jobs report with dismay. To Lee, it was an overreaction. “Markets tend to have a ‘fire-ready-aim’ response to negative surprises,” he noted. “In my view, the July jobs report is consistent with a soft landing,” he asserted, further pointing out that “Fed cuts can reverse the soft areas of the economy — durables, auto sales, and housing sales, for instance — at a time when consumer leverage and corporate leverage is not that high. And the Fed has lots of room to cut.”

A look at Fed funds futures trading suggests that the market is also trying to figure out what the week’s job numbers might mean for the Fed’s next steps. After leaving rates unchanged on Wednesday, the Fed signaled the possibility of a rate cut in September. Powell’s dovish remarks caused the odds of a 50-bp rate cut (as opposed to the customary 25 bp) to spike briefly during the press conference. They then surged to over 73% on Friday after the federal jobs report. (We can see this in our Chart of the Week):

This led to a rhetorical question from Lee: “Has the economic picture deteriorated so much in the last two days so as to justify a 10% drawdown in both small caps and the Nasdaq 100?” In his view, "that hardly seems to be the case. We don’t see the economic picture as being incrementally that different today [Friday] than it was at the beginning of the week.” 

Lee’s intermediate- and long-term equities outlook remains constructive. Yet in the near-term, he suggests patience. “Time is required to let the selling get done as investors de-risk. The selling of the last few days cannot reverse instantly. Keep in mind that opportunities emerge when markets panic. And in the coming days, this is the opportunity that emerges.”

The Bank of Japan

The BOJ raised its benchmark rate by 25 bps to 0.25%, signaling that Japan’s central bank is prioritizing concerns over the country’s climbing inflation, cash-strapped consumers. and weakened currency over its desire to stimulate its economy and boost exports. In the view of Head of Technical Strategy Mark Newton, “This is a substantial shift in policy, where policymakers are putting greater weight on longer-term inflation projections.”

After the BOJ’s policy shift, Newton said he sees “a big breakdown in USD – largely through Japanese Yen gains. USDJPY has broken support and likely will continue lower at this point.” He added, “The decision by the Bank of Japan to halve their bond purchases and hike rates seems to be a big deal. I am quite bearish on DXY, and I expect a much lower U.S. Dollar in the weeks ahead.”

Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the August 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere

Three of the alleged masterminds behind the terrorist attacks of September 11, 2001 have agreed to plead guilty to all charges after years of detention at the U.S. naval base at Guantanamo Bay in exchange for the death penalty being taken off the table. Khalid Sheikh Mohammed, Walid Muhammad Salih Mubarak Bin Attash, and Mustafa Ahmed Adam al-Hawsawi will formally enter their pleas sometime next week. The White House National Security Council said the Biden administration had not played a role in the negotiations.

Two dozen prisoners were freed this week in the largest prisoner exchange between Russia and the West since the Cold War ended. Among those freed was Wall Street Journal reporter Evan Gershkovich. The deal, which involved 24 prisoners held in six countries – 16 from the West and eight from Russia – was originally to have included noted Russian dissident Alexei Navalni. Navalni died in a Russian prison in the Arctic in February. 

The Consumer Product Safety Commission announced that it would hold Amazon responsible for faulty or unsafe products sold on its platform, including those sold by third parties. The decision was made by a unanimous vote at the CSPC and confirmed by an administrative law judge. Among the products cited in the CPSC order were faulty carbon monoxide detectors and flammable children’s pajamas. Amazon said it plans to appeal.

At least 11 are dead after protesters throughout Venezuela clashed with security forces over the result of a presidential election in which incumbent Nicolás Maduro claimed victory. Maduro, who had warned of a “bloodbath” if he did not win and once suggested he would seek victory "by hook or by crook", had been seeking another six years as president after 11 years in office. His critics claim his opponent, Edmundo González Urrutia, won with approximately 70% of the vote. 

Boeing named its new CEO, Robert K. “Kelly” Ortberg, who will take over from Dave Calhoun on August 8. In contrast to Calhoun, an accountant by training, Ortberg, formerly CEO of Boeing supplier Rockwell Collins (now part of RTX), began his career as a mechanical engineer at Texas Instruments. 

Bill Ackman’s Pershing Square USA announced it was withdrawing plans for an initial public offering days after the firm again lowered its fundraising goal from its original $25 billion target to $2 billion.    

California authorities have arrested a man alleged to have started a massive wildfire that was growing at an hourly rate of eight square miles (20 sq km) an hour. The Park fire, which started on Wednesday, has burned 397,629 acres as of Friday, sparking at least one “firenado” and becoming at least the fourth-largest wildfire in California history. Ronnie Stout, 42, is alleged to have deliberately started the blaze by pushing a burning car into a gully at a public park.

And finally: Scientists from the University of Illinois at Chicago (UIC) announced a new antibiotic to which it would be “nearly impossible” for bacteria to develop resistance. Macrolones, a new class of synthetic antibiotics, can make it difficult for bacteria to evolve versions resistant to them by simultaneously attacking two distinct vulnerabilities.