When Good News is Bad News is Good News – The Jobs Report Reversal

Hi. Peter Navarro here with our weekly economy and market rap for the week ending October 6, 2023.  And oh what a week it was.

For any newbies to this podcast and substack, let’s recall that I have been bearish on the US stock market.  So far, that call is tracking pretty well over.

Over the last two months, the S&P 500 peaked at about 4,600 at the end of July and closed today at about 4300.  That about a 7% haircut for a 401k or IRA holding “the market.”  Of course, this was not a straight line fall but rather quite a volatile one marked by a strong bear market trap push back to around 4,500 on September 1. 

During this time, cash has certainly been a safer bet as short term money market rates are grinding out a riskless 5% nominal return –roughly offsetting any losses to your capital from inflation.

Meanwhile, during this two-month period, the leveraged triple-short of the S&P 500 that I like to watch, the exchanged-traded fund SPXU, has gone from about ten bucks to a close today of $11.77.  That’s around an 18% gain.

Of course, these are the kind of grim statistics that the touts on CNBC and Fox Business and Bloomberg love to ignore.  Instead, they tell you to “buy the dip.”  But in this case, that is just dippy.

Come now to the big news items of the week.

For starters, over last weekend, we had a piece of what was supposed to be good news that was supposed to rally the stock market.  This was then-House Speaker Kevin McCarthy’s deal with the Democrat and RINO devils to kick the debt ceiling can down the road for another 45 days.

The spin here was that the market was falling because of uncertainty over a government shutdown.  So, as the spin went, if a deal was reached, that uncertainty would be eliminated and the market should rally.

Well, McCarthy got his deal, but the market fell anyway.  And so did the feckless McCarthy fall from his Speaker throne several days later.

My own view is that BOTH the bond and stock markets would, if not rally, at least stop their bleeding if, in the next 40 days, Congress actually comes up with a bipartisan deal that would significantly reduce the massive budget deficits projected over the next ten years.  It is this prospect of being driven over a fiscal cliff by a profligate Biden White House and Democrat-RINO Congress that is now raising inflationary AND recessionary expectations in a classic 1970s stagflation scenario. 

Now here was the good news is bad news is good news item that we should treat with caution.  It started in Friday am before the market open as the jobs report blew away estimates.  Employers not only added 336,000 jobs in September – the most since January.  It was also close to double that of median estimates of the number.  Meanwhile, the unemployment rate held steady at 3.8%.

Of  course, on this seeming good news, the market tanked at the open.  Analysts saw the good news as bad news as it increased the probability of yet another rate hike by the Fed at the November meeting.

Yet hours later, the market had a change of bad news heart, and the S&P 500 underwent a massive bullish reversal, rising 1.18% on the day, with a more than 2% swing.

What are we to make of this?  Simply that the blowout jobs numbers are also signaling a blowout real GDP economic growth number for the third quarter – the Atlanta Fed is predicting 4.9%, a full two points higher than the Blue Chip forecast consensus.

If growth is that fast, it must also be the case that there will be robust earnings, and since stock prices are driven by earnings, this may be why the market decided on Friday to buy, buy, buy.

My takeaway from this bullish reversal is that we are not back to a bull market but rather to a trading range market where any short side speculation may get your fingers singed and any long side speculation will have a short shelf life – no pun intended. 

Why might this be so?  Simply because a growth rate of nearly 5% is both totally unsustainable and highly inflationary.  What today’s action means, then, in the longer run is continued high interest rates and inflation rates.

And by the way, as bad as the stock market has been over the last several months, the bond market has been far, far worse since Joe Biden got into the White House.  It is in absolute free fall, suffering multi-trillion losses and massive percent haircuts worse than the bond market routs of both 2008 and 1981.

The mechanics are pretty simple: Bond prices are inversely related to the inflation rate.  So if you own, say, a 10-year bond and the inflation rate rises, its price you could get for it in the market falls.  So as interest rates under the Biden regime have climbed from near zero to over 5%, bond portfolios have been hammered.  In fact, it was the losses on the value of bonds that triggered the recent banking crisis.

So, the next time your broker or a CNBC tout says bonds are “safer” than stocks, tell him “Au contraire, mon bozo.”

By the way, I should note here that my biggest nerd laugh of the week came from an article in which one bond market analyst was praying for a stock market rout because that would be the only way bonds could become relatively more attractive in this rising interest rate environment.

Stay tuned! I’ll have more to say about this next week in the Substack.

For now, that’s it.  This is indeed a time to pay very close attention to the financial news and be very careful with your nest egg in this difficult times.  In my household, cash remains king. 

Peter Navarro. Out.