Market Tumbles On Rosy Jobs Data | Jack & Max Break-Down Non-Farm Payroll (NFP) Sell-Off and Current Macro Regime
Monetary Matters with Jack Farley
Deep Dive
Why did the stock market sell off after the December jobs report?
The stock market sold off because the December jobs report showed stronger-than-expected job growth, with 256,000 jobs added compared to the expected 164,000. This, combined with a significant drop in the unemployment rate from 4.24% to 4.08%, signaled a robust labor market. Investors interpreted this as a sign that the Federal Reserve might delay rate cuts, leading to higher interest rates for longer, which negatively impacted equities.
What was the impact of the Michigan consumer inflation expectation surveys on the market?
The Michigan consumer inflation expectation surveys showed a significant jump in both one-year and five-year inflation expectations, rising to 3.3% from 2.8% and 3% respectively. This increase in inflation expectations spooked markets, as it suggested that consumers remain concerned about inflation despite central bankers' claims that inflation is under control. This added to the market's unease and contributed to the sell-off.
Why did the Russell 2000 underperform compared to the S&P 500?
The Russell 2000, which represents small-cap companies, underperformed the S&P 500 because small-cap companies are more sensitive to interest rate changes. Many of these companies rely on floating-rate debt, making them more vulnerable to higher borrowing costs. Additionally, the narrative shifted to high interest rates being detrimental to small-cap companies, while large-cap tech companies like Nvidia and Apple, with strong balance sheets, were seen as less affected.
What is the current correlation between stocks and bonds, and why is it significant?
Stocks and bonds have been positively correlated for most of 2023 and 2024, meaning they tend to move in the same direction. This is significant because historically, stocks and bonds have had a negative correlation, with bonds acting as a hedge during stock market declines. The positive correlation, particularly evident in 2022, has alarmed investors as it reduces the diversification benefits of holding both asset classes. This trend continued with both stocks and bonds selling off after the strong jobs report.
Why did gold rally despite bonds selling off?
Gold rallied despite bonds selling off because the rise in inflation expectations, as indicated by the Michigan consumer survey, reduced real yields (nominal yields minus inflation). Since gold is often seen as a hedge against inflation, the increase in inflation expectations made gold more attractive, even as bond yields rose. This dynamic is supported by the positive correlation between gold and Treasury Inflation-Protected Securities (TIPS) over the past decade.
What is the significance of the equity risk premium being negative?
The equity risk premium, which compares the earnings yield of the S&P 500 to the yield on the 10-year Treasury, turned negative for the first time in decades. This means stocks are no longer offering a premium over bonds, which is unusual since stocks are considered riskier. While this suggests equities may be overvalued, historical data shows that a negative equity risk premium does not necessarily predict near-term market performance, as seen during the late 1990s bull market.
What are the potential risks to the market from President Trump's policies?
Potential risks from President Trump's policies include his plans to cut the deficit, which could slow economic growth, and his proposed tariffs, which could be inflationary. These policies create uncertainty for markets, as they could lead to slower growth and higher inflation, both of which are negative for equities. Additionally, the market's current pricing of a Republican administration as positive for stocks could be quickly unwound if these policies lead to adverse economic outcomes.
What is the outlook for speculative excess in the equity and crypto markets?
In the equity market, speculative excess is not as pronounced as it was in 2021, with fewer low-quality IPOs and SPACs entering the market. However, there are signs of speculative behavior in certain stocks like Palantir and MicroStrategy. In contrast, the crypto market shows clear signs of speculative excess, with meme coins and tokens like 'fart coin' reaching billion-dollar valuations. This suggests that while equities are less speculative, crypto remains a hotbed of speculative activity.
- 256,000 jobs added in December (vs. 164,000 expected)
- S&P 500 down 1.5%
- Russell 2000 down 2.35%
- High interest rates impact small-cap companies more
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