The stock market’s recent decline is not a response to bad news, but rather a reflection of concerns about the sustainability of the economic growth. The strong jobs numbers and falling unemployment rate may have triggered a mini-market tantrum, but the market is worried that the bond market and Federal Reserve may tighten financial conditions too quickly, which could lead to a growth scare.
The market is unsure about how the impending policy mix of tariffs, immigration restrictions, and deregulation will affect the economy and interest rates. With the 10-year Treasury yield running high, the market is pricing in future growth, but there are concerns about the housing and manufacturing sectors.
The recent employment report validated the market’s expectations of no near-term rate cut, and the dollar’s strength is worrying some investors. Credit markets remain firm, but the upward march in Treasury rates has made high-grade corporate debt more attractive.
The market is reaching longer-term extremes in valuation, and some investors are warning of a possible growth scare. However, some measures suggest that the bull trend is still intact, and a frustrating, churning range may be ahead for a while longer.
The next few weeks will bring important economic data, including the CPI inflation report and corporate earnings. With the market already expecting good news, it may be harder to please and easier to rattle in the short term. However, the market’s recent decline may be a sign that it is draining elevated expectations from the price.