Market behavior is too abnormal! Many strategists are backing: now is the time of "greed"

The soft non-farm payroll report in July has raised concerns in the market that the Federal Reserve's decision to keep interest rates at a 23-year high in its recent meeting was a mistake. Now, the focus of discussion among some in the investment community has shifted from the timing of rate cuts to when the U.S. economy might enter a recession.

However, several economists and stock strategists believe that despite the increased recession risks due to weak economic data, the market's recent behavior has been an overreaction.

Torsten Slok, Chief Economist at Apollo Global Management, said in an interview on Tuesday that the market's "expectations for rate cuts are too high."

Following the release of the employment report last Friday, investors quickly adjusted their expectations for rate cuts in 2024 to over four times, exceeding the Fed's previous expectation of three cuts after the July 31 meeting. Some market commentators even suggested that the Fed should cut rates before the September meeting.

Slok added that given the significant fluctuations in market expectations for Fed rate cuts over the past few trading days, investors should adopt a "cautious attitude" towards market forecasts.

Slok pointed out that data shows consumer spending on activities such as air travel, dining out, and hotel stays remains strong, indicating that there are no significant signs of consumer contraction at the moment. "Overall, there is not much evidence to suggest that the economy has entered or is heading towards a recession."

The most concerning part of the July employment report was the rise in the unemployment rate to 4.3%, triggering a closely watched recession indicator—the Sam Rule. The report also showed that monthly job additions fell to the second lowest level since 2020.

However, Brett Ryan, Senior Economist at Deutsche Bank in the U.S., believes that the report still indicates that the labor market is "supported by a lack of layoffs rather than strong hiring, with the composition of the rise in the unemployment rate different from what is typically seen in the early stages of a recession."

Ryan believes that the increase in the unemployment rate is mainly due to an increase in labor supply, with more people entering the labor market for the first time or returning to work, rather than an increase in permanent layoffs.

"You shouldn't overreact to a single data point," Ryan said. "Certainly, risks have increased, but as to whether the Fed will start cutting rates more aggressively? We're not there yet."

For example, the recent weekly initial jobless claims reached the highest level in nearly a year. However, Ryan pointed out that if we exclude Texas, where workers were displaced due to hurricanes, the four-week average of initial jobless claims has actually been decreasing.

Michael Gapen, U.S. economist at Bank of America, holds a similar view. In a report to clients, he wrote that without significant layoffs, the rationale for a substantial rate cut due to labor market dynamics is weaker than the market expects.

"Rate cuts in September are a done deal, but we believe the Fed does not need an aggressive rate cut scale similar to an economy entering a recession," Gapen wrote in a report to clients on Monday

Will Risk Assets Rebound?

Some strategists also believe that the market's strong reaction to this data provides an opportunity to take more aggressive actions in the stock market.

Jean Boivin, head of investment research at BlackRock, wrote in a report to clients on Monday that they believe "recession fears have been exaggerated."

"We believe that as recession fears recede and arbitrage trades quickly reverse and stabilize, risk assets will rebound," the BlackRock team wrote. "We maintain our overweight position in U.S. stocks, driven primarily by the power of artificial intelligence, and believe that the sell-off provides a buying opportunity."

Seema Shah, Chief Global Strategist at Principal Asset Management, also agrees with this. In an interview on Tuesday, Shah pointed out that the market rebound indicates, "what you're seeing is just a reality check, perhaps economic concerns are not as severe as expected."

Shah added that in this market environment, the key issue investors need to focus on is whether the macro narrative has completely changed. Currently, she believes the situation remains the same as before. She said:

"We expect the U.S. economy to slow down, but we do not expect a recession. We expect the Fed to cut rates, but again, we do not expect the Fed to be forced to cut rates significantly. So, from that perspective, our fundamentals have not actually changed."