Stocks sold off heavily this morning with the Standard & Poor’s down 2% and the NASDAQ Composite off 1.9%. They have rallied in the afternoon so that the S&P 500 is up 0.16% % and the NASDAQ is up 1.75% at the close.
What we’re seeing is the current consensus at work. (No guarantee that the consensus is correct. I don’t think it is, just for the record.)
The first part of the consensus is that a recession is very likely. And not way off in 2024. Try in the second half of 2022.
So we’re seeing big sell-offs in everything where demand (and/or prices) are likely to fall in a recession, U.S. benchmark West Texas Intermediate crude was down 8.33% today to $99.40 a barrel. Copper dropped 4.66% to a 19-month low. Corn and wheat are both lower. Teucrium Corn Fund (CORN) is down 4.57% as of 3 p.m. New York Time. Teucrium Wheat Fund (WEAT) is down 4.48%. Commodity stocks are down too with ConocoPhillips (COP) lower by 7.67% and Alcoa Aluminum (AA) down 6.90%.
The second part of the consensus is that with a recession so much closer, interest rate cuts from the Federal Reserve have moved lower too. So it’s time to start building positions for a payday on lower interest rates in the first half of 2023. Today, the yield on the 10-year Treasury is down 7 basis points to 2.81% as buying has pushed Treasury prices higher. The yield on the 5-year Treasury has dropped to 2.83%. On June 21, the yield on that maturity was 3.15%.
What could upset this consensus in the near term:
We get June jobs numbers on Friday, before the market open. Economists expect the June report to show that the economy added 250,000 jobs in the month and that the unemployment rate held steady at 3.6%.
That might be enough to push back the schedule for any recession for a few months. It’s hard to see the economy tanking quickly when the jobs market is still relatively strong–although 250,000 jobs isn’t robust growth.
And since the market is a discounting mechanism, which is currently discounting an impending recession, a delay might be enough to reverse some recent losses. Although I wouldn’t expect a big or long rally on the June report if it comes in near expectations.
In other words this remains a tough market to trade right now. And I wouldn’t be putting on any short-term bearish bets this week.
