No matter how you slice it, one thing is for sure…
Volatility is back.
We saw that firsthand last week.
Last Tuesday, the markets came under heavy pressure once again. This time, it was more worry about economic news on the horizon. The S&P 500 Index was down more than 2%. And the markets continued to slide the rest of the week.
On Wednesday, data showed that the number of open jobs in July was down from the number in June. Meanwhile, the number of layoffs increased.
Sure, the market pundits on TV have been saying that a July uptick in unemployment was due to a hurricane in Texas.
Maybe so… but the headlines of layoffs nationwide were happening way before hurricane season.
Then on Friday last week, additional data showed that slightly fewer jobs than expected were created in August. In the same report, the previous two months saw big downward revisions in the number of jobs created for each month.
The change in the labor market is real. And when it comes to interest-rate cuts, the labor-market situation could lead to an overreaction from the Federal Reserve…
Again, major layoffs have already been happening in 2024.
Here are a few pieces of anecdotal evidence that you might have seen earlier this year in the tech sector…
In January, Microsoft (MSFT) announced layoffs of 1,900 employees (primarily in its gaming unit) as part of a broader plan to reduce overlap areas.
That same month, Alphabet’s (GOOGL) Google laid off hundreds of workers from its ad sales team and other departments, with a focus on automation and AI.
Amazon (AMZN) has cut hundreds of jobs in its health care businesses – including One Medical and Amazon Pharmacy – and other departments throughout 2024.
In March, Dell Technologies (DELL) announced 6,000 layoffs due to declining demand for personal computers.
And Apple (AAPL) has reduced its workforce in various projects – including hundreds of job cuts this spring when the company scrapped its self-driving-car project.
In addition to the big names above, the tech sector has lost an estimated 60,000-plus jobs across 254 firms in 2024.
In the financial sector, Goldman Sachs (GS), Citigroup (C), and Deutsche Bank (DB) all had job cuts.
In the automotive sector, mainly the electric-vehicle area, both Tesla (TSLA) and Rivian Automotive (RIVN) announced plans to lay off 10% of their workforces earlier this year.
So my concern is that the Fed will see a weaker labor market and overreact by cutting rates too aggressively.
After all, just about everyone expects a 25-basis-point rate cut from the Fed this month. But it could be higher. The Fed could cut rates by 50 or even 75 basis points.
That might not sound like a big difference. But in global finance, it’s huge.
The big problem is the speed of the rate changes.
If rates are cut by too much and too fast, that will shock the system – both mechanically and emotionally.
Said another way, the markets can and have done well with rates at higher levels. So the level of rates matters less to the markets than the amount of time markets will have to react to a change.
And that will ultimately change the perception of investors.
Global markets could take overly aggressive rate cuts as a sign of a bigger problem. And firms could sell off assets to prepare for greater volatility to the downside.
Of course, this is speculation. Markets have a way of working things out much faster today than they have historically.
And here at Chaikin Analytics, our job is to focus on stocks that are trending higher in any environment – through the use of the Power Gauge.
Meanwhile, the markets are doing what is necessary. Investors are rotating to the industries that have less uncertainty – such as utilities and consumer staples.
Of course, this could change… and we’ll be ready to act if it does. For now, the interest-rate-sensitive and defensive sectors seem ready to handle the volatility.
But like everyone else, I’ll have my eye on the Fed. When it comes to interest rates, “speed” matters.
Good investing,
Pete Carmasino
