The bull market was born nearly two years ago and has been sustained ever since by a sole premise: Inflation is falling faster than the U.S. economy is slowing. The downslope of price pressures was set to meet the steady advance of GDP at a crossroads called Soft Landing, at which the Federal Reserve could undo, in triumphant but deliberate fashion, the policy tightening that began two-and-a-half years ago. While these broad forces remain in place – both consumer inflation and real GDP running in the comfortable corridor between 2% and 3% – stocks are wobbling and bond yields swooning as investors worry the economy has gone from slowing to stalling. That’s the pretty clear message of Wall Street relapsing into growth-scare mode as conviction in a soft landing leaks from asset prices, with the S & P 500 sliding 4.2% last week and returning to levels first reached in June. Utilities are now trouncing semiconductors this year, while the 10-year Treasury yield slumps to a 14-month low near 3.7%. .SPX mountain 2022-09-05 S & P 500, 2 years Friday’s employment report for August was disappointing on its face and frustrating to traders for its failure to clarify the present state of the labor market. Its 142,000 net new jobs print was below the 160,000 forecast and downward revisions to prior months payrolls were downbeat. Yet a six-figure job gain and small dip in the unemployment rate were beheld by some eyes as inconsistent with a worrisome downturn. Bank of America economists declared the report “soft but not weak.” The debate over the exact character of the landing of the economy as the Fed has kept steady pressure on the brake for 14 months might seem overwrought, as some Wall Street story lines become. Yet whether the economy continues to grow or rolls over into shrink mode is close to the whole ballgame for stocks in the medium term. Stocks after rate cut There is no single way the market behaves after an initial Fed rate cut, no matter what the archivists insist. If the cut was not followed relatively soon by a recession, stocks have carried higher. If the cut is later shown to be too little and late, the market suffers acutely. Once the Fed has signaled that easing is in the offing, as Chair Jerome Powell clearly did last month, then the market craves good economic news as reassurance that the cuts are more insurance than rescue. Such reassurance was mostly withheld last week, with squishy manufacturing, employment and Fed Beige Book indictors, even as the huge services sector continues to plug along in decent shape. Still, as I’ve continually noted, the road to a soft landing is paved by constant doubts that the soft landing is assured. It’s more a contingent, ambiguous condition rather than a destination recognized by all. The bond market is urgently pleading with the Fed to get on with its policy reversal, the yield on the two-year Treasury now at a record distance below the Federal funds rate. US2Y 1Y mountain 2-year Treasury yield, 1 year Such messages need to be respected but they’re not the final word on how the economy plays out from here. Layoffs remain at subdued levels, wages continue to grow faster than inflation on a one-year look-back, even as unit labor costs have fallen such that productivity measures are rising briskly. Warren Pies, founder of 3Fourteen Research, finds that residential construction employment is a reliable harbinger of recessions. For now, it continues to hold up, leaving a soft landing his base case, but it’s becoming a closer call and housing activity will need to pick up soon in response to lower rates. Tim Hayes, global strategist at Ned Davis Research, last week pointed to impressive earnings-revision breadth – many more companies having upward profit forecast changes than downgrades – across world equity markets. This, historically, is inconsistent with a near-term recession as well. Credit markets, too, are firm, with a huge issuance flood of corporate debt last week easily absorbed by investors. Momentum stocks failing As crucial as the macro crosscurrents are, the stock market is dealing with more than just the economic backdrop. A sharp downside reversal in momentum strategies and disruptive leadership shift away from mega-cap growth stocks has been buffeting the tape since mid-summer, too. As I’ve noted many times, a more broadly inclusive equity market is not necessarily a more stable one in the moment, and the action this quarter show how twitchy the market can get when the heftiest index leaders are under pressure. The Philadelphia Semiconductor Index is some 24% off its record high in two months, with the equal-weighted S & P 500 up a couple percent over that same period. .SOX YTD mountain PHLX Semiconductor Index, YTD The Nasdaq 100 went down more in the July-August setback, recovered less of its losses in the market rebound and has continued to underperform in the latest retreat, as a broad rethink of the AI-investment theme cools down the leading proxies of the boom. It’s a “be careful what you wish for” moment for those who spent months pining for less-concentrated market leadership, but so far the frictions haven’t been too damaging. For all the unease in the air and squirrely tape action last week, the S & P 500 is less than 5% off its mid-July all-time peak and it remains 4% above its early-August correction low. On a very short-term basis, the index is roughly as oversold as it was near the Aug. 5 tactical low. And it sits at an interesting spot near 5400, a breakout level from June ahead of second-quarter earnings and very favorable inflation data. .SPX YTD mountain S & P 500, YTD In a broader frame, the market at the July 16 all-time peak had fully capitalized on a fleeting embrace of perceived certainty: that a soft landing was in the bag, the Fed would ease at the right time for the right reasons and market breadth could improve while the crowded and expensive Magnificent 7 stocks held their premium. We’re now a couple of months into questioning each of those beliefs. The imminence of a Fed rate cut and suspense over the macro data flow is draining the conviction of the bulls, but that’s not the same as saying their case is yet lost.