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Stocks Retreat as Strong Job Report Dampens Rate Cut Hopes

By:JJ Kinahan

U.S. stocks pull back as the jobs report shows a strong economy and dims rate-cut prospects

  • The jobs report shows a strong economy and dims rate-cut prospects, prompting a market reversal and increased caution.
  • Earnings season slowdown and overvaluation concerns hint at potential market correction ahead.
  • Rally in gold, bonds, and rising volatility suggest market may be approaching a tipping point.

Friday witnessed a reversal in the stock market's trajectory, as gains earlier in the day gave way to declines by close.

The S&P 500 experienced a 0.65% drop, contributing to a weekly decline of 0.3%, while the Nasdaq Composite fell by 1.16% on Friday and 1.2% for the week. Despite these setbacks, both indices boast year-to-date gains exceeding 7%.

The release of Friday's job report revealed stronger-than-anticipated numbers, underscoring the economy's resilience and diminishing the likelihood of an interest rate cut before summer. This week promises a flurry of economic data, including the Consumer Price Index (CPI), Producer Price Index (PPI), and Retail Sales figures. Tomorrow kicks off with the CPI, with forecasts predicting a 0.3% month-over-month increase in Core CPI and a 3.7% year-over-year rise.

Earnings reports coming

Earnings reports from several companies are also on the agenda this week, with Oracle (ORCL) leading the charge after Friday's market close. Subsequently, investors will turn their attention to Dick's Sporting Goods (DKS), Dollar General (DG), and Dollar Tree (DLTR).

As earnings season nears its conclusion, projections indicate first-quarter earnings growth of 3.4%, a decline from December's forecast of 5.6%. FactSet data suggests consensus forecasts anticipate an 11% full-year earnings growth following a meager 2% in 2023.

Of particular interest are the growth rate forecasts, with the market currently trading at 21 times forward-looking earnings, surpassing the five-year and ten-year averages. This suggests stocks may be overvalued relative to historical norms. Any downward revisions or earnings misses could precipitate a market correction towards historical valuation averages.

Gold surges

Several indicators hint at a potentially overextended market, including the rallying of gold and bonds. Gold surged by 5% last week and has climbed 9% since February 14, while the yield on ten-year notes dipped below 4.8%.

Both gold and bonds, typically viewed as safe havens, have witnessed notable inflows. Furthermore, market volatility has shown signs of an uptick, with the CBOE Volatility Index (VIX) rising over 7% pre-market trading to 15.80, indicating a cautious sentiment among investors.

Conversely, bitcoin continues its ascent, surpassing $72,000 in premarket trading, thereby driving up related stocks like Coinbase, MicroStrategy and Robinhood. As the week unfolds, attention will remain fixed on the interplay between gold, bonds, and volatility. While calling a market peak remains a precarious endeavor, discernible signals suggest the rally may be losing momentum. In navigating these dynamics, adherence to investing plans and long-term objectives is paramount.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan

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