Friday, August 2, 2024

Concerned About Jobs

  • It hasn’t all come undone.
  • The EU has an AI law.
  • “Recession” can be reality too.
Senior Editor, StockPick Daily
MARKETS

The Other Side of the Rate Cut

A reasonable shift in focus excites a little bit of fear.



The Federal Reserve is now prioritizing the employment part of its dual mandate rather than inflation.

And investors, traders, and speculators are concerned about what that shift means for the economy and earnings.

Right on time, the Bureau of Labor Statistics will deliver the July nonfarm payrolls report at 8:30 a.m. ET.

There is always something else, something different, something new to be concerned about, especially for investors, traders, and speculators.

Risk management is a critical part of maintaining a portfolio of assets over time.

If you’re not identifying risks and adjusting for new information – and new opportunities – what are you doing but collecting.

The federal funds futures market is now pricing in three rate cuts by the Federal Reserve in 2024.


We can be reasonable, though, in our assessments.

And price action over Wednesday and Thursday doesn’t seem reasonable, whether or not weekly jobless claims came in higher than expected.

The Russell 2000 $RUT, for instance, was down more than 3 percent.

At the same time, the bond market was pricing in three rate cuts this year, with the yield on the 10-year US Treasury note dropping below 4 percent for the first time since February.

RUT, of course, is only just coming off a historic period of outperformance versus the S&P 500 $SPX. Can it be a “sell the news” thing when the Fed hasn’t cut even once yet…

Here are a few random notes to keep in mind as well.

No. 1, it’s summer. Volume is down. No. 2, we’re in a seasonally weak period.

And, No. 3, so far, 2024 is the best presidential election year ever for the SPX, despite recent volatility in that particular market.

Still, it would be irresponsible not to account for potential downside indicators, as Jean-François Tardif of Timelo Investment Management reminds us in a recent StockPick Interview.

The CBOE Volatility Index $VIX was up 13.63 percent on Thursday, August 1, 2024, to 18.59.


This morning’s incoming data – less noisy than claims data but still subject to future revision – will offer more clues about the health of the labor market.

There is no question that hiring and wage growth are slowing. But there’s nothing to suggest a collapse is on the horizon.

As much as Wednesday was an overreaction, so was Thursday. Probably best to be prepared for more of the same this Jobs Friday.

Volatility spikes create both inefficiencies and opportunities.

That’s important to remember right now.
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August 2, 2024
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DEEP DIVE

The AI Revolution Will Be Regulated

Capex and ROI remain the major metrics.



It was only a matter of time before the AI revolution spurred an official government response.

It just so happens the European Union’s Artificial Intelligence Act took effect on a day Nvidia $NVDA was shedding more than 7 percent off its share price and about $200 billion in market capitalization.

This is indeed the first attempt to regulate AI, but there’s much correlation here, little causation.

There’s concern overseas about the potential negative consequences of what could or could not be an explosive technology.

The European Commission first proposed the legislation in April 2021, and the European Council adopted a general framework in December 2022.

The law passed the European Parliament in its final form on March 13, and it was approved by the EU Council on May 21.

Its main provisions will take effect over the next 36 months. It establishes measures based on EU copyright and cybersecurity law and includes requirements for regular testing and review.

The act is designed to regulate applications based on the level of risk they represent to society.

AI applications designated “high risk” – including autonomous vehicles, medical devices, loan decision systems, educational scoring, and remote biometric identification systems – will be subject to the greatest scrutiny.

That includes risk assessments, high-quality training, routine activity logging, and mandatory sharing of detailed model documentation with authorities to ensure compliance.

Violators will be subject to fines of as much as €35 million or 7 percent of annual global revenue, whichever is higher.

The process has been relatively slow, and it’s still too early to tell what kind of real-world impact the AI Act will have on the US tech behemoths it intends to constrain.

The European Union’s Artificial Intelligence Act is the first significant attempt by a global government to regulate AI.


The EU wants to regulate its development, use, and application as investors, traders, and speculators start to question whether anyone, anywhere, will ever make money off AI.

That’s the main question right now. The EU’s act can’t be ignored. Neither can it be made into a mountain.

Even then, Big Tech would find ways around or avoid it.

NVDA sold off hard the day after it was up more than 13 percent and added a one-day-record $330 billion to its market cap.

But Meta Platforms $META was up another 4.82 percent after it reported strong second-quarter numbers and boosted its full-year capex budget for more AI spending.

Microsoft $MSFT was down 0.69 percent, but that was follow-through on the way it didn’t beat expectations enough.

Alphabet $GOOGL too continues to struggle in the aftermath of its earnings report.

Amazon.com $AMZN and Apple $AAPL were both down more than 1 percent ahead of their after-the-closing-bell earnings releases.

Amazon then reported weaker-than-expected second-quarter revenue and also let down Wall Street with its guidance and slid more than 4 percent in after-hours trading.

Apple returned to positive revenue growth and beat expectations, its shares rising 0.54 percent in the after market following the announcement.

CEO Tim Cook said a year-over-year increase in the spend for AI and Apple intelligence is “embedded in our results this quarter.”

Cook also said the sales impact from its AI initiatives won’t be clear until it starts shipping to customers later this fall.

Meta said it’s using AI to improve its ad targeting and boost sales for what remains its key revenue driver. That’s substance.

Investors, traders, and speculators want to see more of that.

And then we’ll see what happens if AI regulation emerges from the often sclerotic US federal legislative process.
THE STOCKPICK INTERVIEW

We Must Consider the “R” Word

It’s a matter of how much slower things get.



Statistics say Canada is already in recession, and the country that puts the “north” in “North America” could be the canary in the economic coal mine.

That’s according to Jean-François Tardif, the founder and president of Timelo Investment Management.

“Canada has barely any growth despite 3 to 4 percent population growth,” Tardif notes. “And the US is full of innovation, including AI, and the economy is still strong.

“But I expect the US to slow down.”

A big part of its outperformance is based on its high deficit and total debt and the fiscal stimulus that combination represents.

That deficit and that debt will become a big liability over the longer term, defined by Tardif as the next two to three years.

The Sahm Rule, a recession indicator based on the three-month moving average of the unemployment rate relative to its low during the previous 12 months, is close to triggering.


“The debt is high, the deficit is high, and the world economy is not doing great,” Tardif explained. “We've had extreme excesses for many, many, many, years, and it's time to pay up.”

What that means for markets is a correction on the order of 20 percent to 30 percent. That’s based on history.

But the next recession, in Tardif’s view, is going to be different “because of the past extreme excesses.” That includes a huge amount of money-printing, negative interest rates, and a lot of malinvestment all over the world.

“I expect the next recession in North America and the world to be longer and probably deeper,” Tardif said, “meaning the peak to the trough will be probably more meaningful than in the past few recessions.”

In that event the stock market correction could be even worse than 30 percent. And, people, get ready…

“In terms of timing, it's hard to really know exactly, but in my view, we're very close.

“So, yeah, so it's a pretty bearish outlook. Sorry to tell you.”

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Concerned About Jobs

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