The Zigmont Report (Daily Market Recap for 10/4/18)

Mike Zigmont

Mike Zigmont, author of the Zigmont Report, is a partner at New York-based Harvest Volatility Management, a hedge fund with over $12B AUM, offering volatility management solutions to its investor base worldwide.  Mike has been publishing his daily newsletter (Monday-Friday) privately for the firm’s investors and his personal contacts in the investment business since 2008, sending it daily shortly after the market close.

The opinions expressed below are my own and do not necessarily represent those of Harvest Volatility Management, LLC.

Round 2.  It was stocks vs bonds again.  Stocks lost the round clearly.  Yields climbed across the curve this morning.  Higher rates hurt stocks and the S&P opened down only 5 handles…. No big deal.  However the intraday momentum players appeared to be at work again and the tape dribbled lower in a very calm and very consistent fall.  The Chinese spy chip story added some negativity to the mix, really pressuring AAPL and AMZN.  Dip-buyers made their move around 2:30 PM and repaired half of the damage… the lift in equities resulted in less of a spike in rates as well.

Let there be no doubt.  The treasury market and the equity market are joined at the hip right now.  They’ve gone their separate ways a few times this past year but they’re affecting each other again.  Who knows who long that lasts…

Anyway, the point of the moment is that treasuries matter with respect to stocks.  Higher rates hurt stocks and presumably if rates drop, equities will catch a relief rally.

Tomorrow’s nonfarm payrolls data (+185k est vs +201k prior) will be more important than I initially thought because that number is going to move the treasury market – and equities are now sensitized.  There were some crazy rumors/speculations that a +300k number was coming.  I doubt those rumors have a reasonable foundation but it suggests to me that markets are getting concerned that the Fed will be forced to get very hawkish very soon, which would be Armageddon for stocks.

I think that’s an unreasonable fear but it’s instructive nonetheless.  If things are not *that* drastic but the Fed must get slightly more hawkish a bit sooner, that’s still bad for equities.  It certainly means the local highs are in and probably a minor bear run is ahead.

All of this risk isn’t really so much a risk of recession.  There’s a fear of that of course.  Really what I think is going on is that the high valuations are fragile to higher rates (more specifically rates climbing more quickly than expected).  We could be looking at continuing robust economic growth but a valuation correction.

Let’s see what the nonfarm data says tomorrow and how treasuries and stocks behave.

See you then,