![The sluggish bull market enters its second birthday with a soft economic landing in doubt and leading brokerages losing ground.](https://news7g.com/wp-content/uploads/2024/09/108030032-1725567816986-gettyimages-2170415731-ms2_1602_xphdd5et-780x470.jpeg)
The bull market was born nearly two years ago and has been sustained ever since by a single premise: Inflation is falling faster than the US economy is slowing. The downward price pressure is set to meet the steady progress of GDP at a crossroads known as Soft Landing, at which point the Federal Reserve can, in a triumphant but deliberate way, undo the tightening policy it began two and a half years ago. While these broader forces remain in place—both consumer inflation and real GDP are running in comfortable corridors between 2% and 3%—stocks are floundering and bond yields are falling sharply as investors worry that the economy has moved from slowing to stagnating. It was a pretty clear message of Wall Street slipping back into growth fear mode as confidence in a soft landing seeped out of asset prices, with the S&P 500 sliding 4.2% last week and back to levels first reached in June. Utilities are now beating semiconductors this year, while the 10-year Treasury yield fell to a 14-month low near 3.7%. .SPX mountain 2022-09-05 S&P 500, 2 years Friday’s August jobs report was disappointing on the surface, leaving traders frustrated by failing to shed light on the current state of the labor market. The report’s 142,000 net new jobs figure was below the 160,000 forecast and downward revisions to payrolls in previous months were not optimistic. Still, the six-figure job gains and small drop in the unemployment rate were seen by some as inconsistent with a worrying downturn. Economists at Bank of America called the report “soft but not weak.” The debate over the exact nature of the economic landing, as the Fed has been pressing the brakes for 14 months, seems overblown, as some of the narrative on Wall Street has become. But whether the economy continues to grow or slips into recession mode is almost the whole ballgame for stocks in the medium term. Stocks after rate cuts There is no one way for the market to perform after the Fed’s initial rate cut, no matter what the refs insist. If the cut doesn’t lead to a recession soon, stocks will have rallied. If the cut later proves to have been too little and too late, the market will suffer severe losses. Once the Fed has signaled that easing is on the way, as Chairman Jerome Powell made clear last month, markets have been hungry for good economic news as reassurance that the cuts are more insurance than relief. That reassurance was largely absent last week, with weak manufacturing, employment, and Fed Beige Book readings, even as the giant services sector continued to perform well. But as I have repeatedly noted, the path to a soft landing is paved with persistent doubts that it is certain. It is a vague, contingent condition rather than a universally agreed-upon destination. The bond market is begging the Fed to continue its policy reversal, with the yield on the two-year Treasury note now at a record low below the federal funds rate. Such messages should be taken with a grain of salt, but they are not the final word on where the economy will go from here. Layoffs remain low, wages continue to rise faster than inflation over the year, even as falling unit labor costs have sent productivity measures soaring. Warren Pies, founder of 3Fourteen Research, sees homebuilding employment as a reliable harbinger of recession. It remains there for now, leaving his base case for a soft landing, but it is getting closer and housing activity will soon pick up in response to lower interest rates. Last week, Tim Hayes, global strategist at Ned Davis Research, pointed to the impressive range of earnings revisions — more companies have raised their profit forecasts than downgraded them — across global stock markets. Historically, this doesn’t bode well for a near-term downturn either. Credit markets are also solid, with a large corporate bond issuance last week easily absorbed by investors. Momentum stocks While macro crosscurrents are important, the stock market is facing more than just the economic backdrop. A sharp reversal in momentum strategies and a disruptive leadership shift away from large-cap growth stocks have also weighed on the bandwagon since mid-summer. As I’ve noted many times, a more inclusive stock market isn’t necessarily a more stable one right now, and this quarter’s performance shows how volatile the market can be when the largest index leaders are under pressure. The Philadelphia Semiconductor Index is down about 24% from its record high in two months, while the equally weighted S&P 500 is up a few percentage points over the same period. .SOX YTD mountain PHLX Semiconductor Index, YTD Nasdaq 100 fell more than it lost in the July-August bear market, recovered less than it lost in the market rally and continued to underperform in the latest pullback, as a rethink of the AI investment theme cooled the boom’s leading representatives. It’s a “be careful what you wish for” moment for those who have spent months pining for less-concentrated market leadership, but so far the frictions haven’t done too much damage. With all the uncertainty in the air and the messy paper tape action last week, the S&P 500 is still 5% below its all-time high in mid-July and still 4% above its correction low in early August. On a very short-term basis, the index is nearly as oversold as the tactical low on August 5. And it sits in an interesting spot near 5,400, a breakout level from June ahead of very favorable second-quarter earnings and inflation data. .SPX YTD mountain S&P 500, YTD In the broader picture, the market at its all-time high on July 16th took full advantage of a fleeting acceptance of perceived certainty: that a soft landing was in the bag, the Fed would ease at the right time for the right reasons, and market breadth could improve while the crowded and expensive Magnificent 7 stocks held their premiums. We’ve now spent a few months questioning each of those beliefs. The looming Fed rate cut and the suspense over the macro data stream are sapping the bulls’ confidence, but that’s not the same as saying their case isn’t over.