WISDOMTREE- Weekly commentary from Professor Jeremy J. Siegel (09/09/2024) :
Last week’s big day in the markets and for the economy was on Friday. I characterized the jobs report as being weakish—not disastrous but certainly not strong. The payroll report came in a bit short of expectations with weak lowered revisions to past reports, and although the unemployment rate adjustment was expected, the U-6 unemployment rate, a broader measure of labor underutilization, continued to rise indicating underlying weakness in the job market. Yet jobless claims, a higher frequency indicator reported last Thursday, actually came in right in my desired range of 200,000-240,000. A positive on the data front.
The market has clearly expressed concerns, aligning with my longstanding view that the Federal Reserve (Fed) is considerably behind the curve. Many argue that a significant initial rate cut of 50 basis points by the Fed at next week’s meeting would panic investors. However, the immediate rally in the Dow following remarks from Chris Waller, a member of the Federal Reserve Board, on Friday that he will be open to a larger rate cut counters this view, underscoring my stance that a more aggressive rate cut strategy would boost markets. Currently, the Fed Funds Rate stands at 5.33%, whereas I firmly believe it should be closer to 4% given current economic conditions.
The bond market is signaling expectations for a weakening economy more sharply than the equity markets. This discrepancy is particularly fascinating and warrants close monitoring. Fed Funds Futures, a tool for gauging market expectations, suggest significant rate cuts ahead, although these futures tend to underestimate the actual cuts expected because they are used to offset market risk. By June 2025, the Fed Funds Futures market was pricing in around 7-8 rate cuts.
On the stock market, the weak jobs report is reinforcing a nascent rotation from growth stocks to value but particularly to dividend-paying stocks. This shift reflects the broader anticipation of rate cuts, making bonds less attractive in comparison. Additionally, while I am not a market technician, I do follow some of these patterns and I observed significant technical sell signals in sectors that were prior market leaders, particularly in tech and semiconductors like Nvidia, which could indicate broader market shifts ahead.
As we look forward to the Fed’s meeting next week, the upcoming Consumer Price Index (CPI), Producer Price Index (PPI) reports and other high-frequency economic data will be crucial in shaping the Fed’s actions. While the U.S. economy is not in a recession and I do not forecast one, the slowdown necessitates more aggressive interest rate cuts by the Fed to mitigate risks and support economic stability.