Its Over, page-23594

Don’t ignore this quiet correction on global markets

Friday night’s US jobs numbers gave markets a nasty jolt, but when we zoom out a more concerning picture emerges.
Sep 7, 2024 – 9.28am

Earlier this week, Chanticleer was lucky enough to interview legendary Wall Street investor Howard Marks, who provided a salient piece of advice: don’t worry about the details, think only about the direction of travel.

So with this in mind, I’m going to resist the temptation to pick over Friday night’s crucial US jobs numbers, which came in slightly weaker than hoped (142,000 jobs created in August, compared with expectations for 165,000) but dissuaded neither bulls from their hopes of a soft landing or bears from their fears of a hard one.
As The Australian Financial Review’s North American markets guru Timothy Moore shows with his handy compilation of reactions to the jobs print, the smart money suggests the Federal Reserve will cut 0.25 per cent when it meets in a couple of weeks, although a 0.5 per cent ‘emergency’ cut isn’t completely off the table.

But in the spirit of Marks, let’s zoom out here and consider the direction of travel in the jobs numbers. Basically, this is the story of a very strong US labour market turning soft, which is exactly what’s supposed to happen with interest rates where they are.

But the rate of change is important. And to understand this, we need to go back in time.


Albert Edwards, Societe Generale’s bearish strategist, points out that the June and July payroll numbers were revised down heavily on Friday night. The June numbers originally showed 206,000 jobs had been created, but have now been revised down twice to show that actually, just 118,000 jobs were created.

As Edwards argues, a number that low would have shocked the market if it was released at the time. But on Friday night, it gets relatively little attention.

The weaker than expected jobs number did give Wall Street a jolt, with the S&P 500 falling 1.7 per cent on Friday night to close the week down 4.3 per cent, the index’s worst week since March 2023.
While every sector on Wall Street finished in the red on Friday night, the biggest pain point was tech, where a middling result from software and chip maker Broadcom released after the market on Thursday night weighed on sentiment. Broadcom itself fell more than 10 per cent, Tesla inexplicably dropped more than 8 per cent, Nvidia and Alphabet were down more than 4 per cent and Amazon and Meta Platforms lost at least 3.2 per cent.

The Nasdaq Composite fell 2.6 per cent on the week, and 5.8 per cent for the week. That’s nasty enough, but it means that the index is now down 10.5 per cent since it peaked on July 1. There’s danger in getting overly excited about round numbers, but that meets the market’s criteria of a garden variety correction.

The Nasdaq is still showing a handy 13 per cent gain since the start of the calendar year. The S&P 500 is only down 4.6 per cent from its recent peak, and the ASX 200 is down just 1.2 per cent. All in all, we’re very much in what Marks calls the “zone of reasonableness”.

But the direction of travel is important.

Remember, investors in Wall Street and around the world have crowded into a very small number of big tech winners, including Microsoft, Nvidia, Apple, Alphabet, Amazon and Meta.

As Bank of America’s Michael Hartnett points out, these companies dominate market indices in an extraordinary way; the Magnificent Seven, which adds Tesla to the six names above, have a combined market value of $US15 trillion, while the 4846 companies in MSCI developed market small and mid cap indices have a combined market value of $US18 billion.

So while concerns about the weakening US economy or a hard landing or emergency rate cuts are unhelpful for markets, we don’t need really bad news to get a major pullback in equities.

Indeed, we’ve got a correction in the Nasdaq Composite based on little more than relatively small cuts to earnings forecasts for big tech companies, and Nvidia falling 18 per cent after delivering a pretty impressive set of second quarter results a week ago.

Perhaps this is the healthy pullback overheated tech stocks need. But positioning remains extreme, and investors are complacent about the risks that a soft landing could turn into something nastier.

September often brings volatility on markets, but don’t ignore the direction of travel.