History shows that central bank easing cycles generally benefit stock markets. However, we should ask why central banks are cutting. If the Fede cuts rates to combat a slowing economy, the news may not be as positive as it seems. A weakening economy means lower corporate earnings and reduced consumer spending, which are ultimately negative for stock prices. Several bleak monthly jobs reports is evidence that the economy is struggling. But is just a soft patch or something worse? I suggest exercising caution – rate cuts are not always a positive.
Employment
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S&P 500 Faces a Litmus Test
The labor market is clearly slowing. The “stag” in stagflation is here – what’s less clear is the “flation” component. With respect to growth – we see slowing in housing, consumer spending and now job creation. The payrolls data was nothing shy of a disaster. And whilst the headlines will report on the dismal 73,000 jobs added (well below the ~140K job additions expected) – the massive 258,000 negative revisions over May and June is cause for concern.
Economic Growth Slows
If we needed confirmation that economic growth is slowing – today we got it. The US economy shrank at the start of the year, restrained by weaker consumer spending and an even bigger impact from trade. Gross domestic product (GDP) decreased at a 0.2% annualized pace in the first quarter. And there were also warning signs from the labor market…