Following the arrival of a less-than-stellar jobs report, the stock market is now wrapping up a bad week on a sour note.
Broadly speaking, August’s jobs data missed expectations and showed a big slowdown in hiring last month. That disappointing print only stoked investors’ fears about a potential recession on the horizon.
But that same jobs report also confirmed that the Federal Reserve is on the way to save the economy (and stock market) with rate cuts – likely starting in less than two weeks.
And we believe those incoming rate cuts should breathe life back into the market and spark a very strong year-end rally in stocks.
Let’s dig into the data to understand why.
Deciphering August’s Jobs Report
Last month, non-farm payrolls rose 142,000 – much lower than the 165,000 expected by economists. Worse yet, both June and July payroll numbers were revised meaningfully lower by a combined 86,000 jobs.
Between August’s weak numbers and the big downward revisions to the June and July data, payroll growth’s six-month moving average dropped to 164,000.
That’s a very low level.
Typically, when the economy is not in a recession, job growth runs at nearly 250,000 new jobs per month.
We’re currently running at a pace of about 100,000 jobs below that. And we’ve been running at that pace for the past six months.
History suggests that if these trends continue, job growth will eventually turn into job loss – and the U.S. economy will spiral into a recession.
The good news, though, is that the Fed can begin to reverse these trends in two weeks.
Federal Reserve to the Rescue
Back in July 2019, non-farm payroll growth had slipped to 90,000 jobs. The next month, the Federal Reserve cut rates. Then it cut rates again several times into the end of the year.
By early 2020, the economy was adding more than 250,000 jobs per month again – and stocks had risen about 10%.
We had a similar situation back in July 1998. Non-farm payroll growth had slipped to around 130,000 jobs. A few months later, the central bank started cutting rates. By the middle of the next year, the economy was consistently adding over 250,000 new jobs per month – and stocks had risen by about 25%.
This trend continues; just look at May 1995. At that time, job growth actually turned negative. A few months later, the Fed began cutting rates. And by early 1996, job growth rebounded to above 250,000 new jobs per month – and stocks had risen around 12%.
Often, when the Fed starts a rate-cutting cycle, it resuscitates the U.S. economy and spurs on a powerful stock market rally.
This happens during a “good” rate-cutting cycle – wherein the Fed cuts rates and the economy avoids a recession.
That is the sort of setup we have today.
The Final Word
Right now, we’re approaching a “good” rate-cutting cycle.
We’re confident it will begin in two weeks. And it should simultaneously resuscitate the economy and recharge the markets.
As such, we see this ugly and frustrating sideways consolidation in stocks – which has lasted for about two months now – coming to an end very soon. And it will likely be replaced by a powerful rally that lasts into the end of the year, at least.
That’s why we want to make sure we’re ready for these rate cuts.
If this cycle does end up being a “good” one, it should create a boatload of investment opportunities. And we want to capitalize on the best of them.
To do that, I’m holding a strategy session next Wednesday, Sept. 11, at 8 p.m. EST to discuss what I feel is the best way to prepare for this fast-approaching rate-cut cycle.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.
