Larry’s Note: Last night at the Fed Decision Advance Warning, we covered how the Federal Reserve’s meeting next week could cause big ripples throughout the market… especially with a second market event scheduled to take place that same week.

When multiple market-moving catalysts line up like this, it can create a setup for outsized profits… especially if you get ready ahead of time.

That’s what last night’s briefing was all about: making sure you are primed to trade as soon as next Monday.

I’ve made a replay available for a short window, but with only a few days left before these events hit, you don’t have much time to waste. Go right here to watch now.

Labor market data is painting a bleak picture of the economy.

Concerns started growing in July. The government payrolls report for that month showed that only 73,000 jobs were added compared to estimates of 100,000.

The August report released last week was even worse. Only 22,000 jobs were created during the month.

Prior months are facing revisions as well… and this is where the situation is becoming very troubling.

The initial estimate for June showed 147,000 jobs added. Downward revisions now reveal that June lost 13,000 jobs during the month. That ends a streak of 53 consecutive months of job growth that started in January 2021.

Jobs are suddenly being wiped from the records. And that’s just scratching the surface on how bad the labor market is becoming…

The Economy Is Worse Than You Think

Assumptions about the strength of the labor market and economy are flat-out wrong. Massive negative revisions to prior estimates are breaking records.

Since early 2022, cumulative payrolls have been revised lower by 1.1 million jobs. This year alone has seen 482,000 jobs removed from initial estimates.

During its annual assessment for the year ending in March, the Bureau of Labor Statistics removed 911,000 jobs from its initial estimate.

That’s a record downside revision to job growth. Here’s the chart of annual revisions to jobs data going back 10 years:

Another report this week showed job openings dropping below job seekers for the first time since the pandemic in 2020.

Data in July showed that the U.S. had 7.18 million job openings against 7.24 million unemployed workers.

Issues facing the labor market keep stacking up, and that’s fueling investor hopes for more interest rate cuts by the Federal Reserve.

But just like so many times before, the Fed is probably too late to help…

Too Late to Save the Economy?

Quick deterioration in the labor market is boosting rate cut expectations. Market-implied odds are now pointing to six 0.25% rate cuts over the next year, for a total of 1.5%.

A Fed that’s aggressively cutting rates may seem like a positive catalyst for the economy and stocks. But history shows that nothing could be further from the truth.

Since 1989, whenever the Fed has cut rates by more than 1.0% after tightening, a recession soon followed or was already underway.

Read that line again.

The reason comes down to the Fed’s mandates. Inflation and labor market data are among the last economic metrics to respond to a changing economy. They are considered lagging indicators.

By the time you see labor market data worsening, the damage to the economy is already done. That’s why the Fed panics and slashes interest rates quickly. But it’s often too late to head off a recession.

Recent evidence from the labor market suggests this time is no different.

The bottom line for investors is to expect a jump in volatility. That’s because the stock market will be caught in a tug of war.

One side will hope that rate cuts boost stocks. The other side will worry about a recession.

After months of a steady grind higher, volatility could finally shake up the stock market’s rally.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict