As DC shutdown deprives Fed of data, chorus warning of turbulence grows

(Originally published Oct. 1 in “What in the World“) Nomura has joined Goldman Sachs in guessing that markets are about to become bumpier.

The Japanese investment bank is increasing staff in its global interest rate and currency trading operations so it can meet what it anticipates will be higher demand for derivatives that hedge against market turbulence. The head of the bank’s wholesale division, Christopher Willcox, explained to Reuters that “global equity markets are at all-time highs. U.S. markets—and within U.S. markets, a narrow set of stocks—have dominated as drivers of value.”

Last November, Nomura hired a new co-head for its foreign-exchange and emerging-markets business from Deutsche Bank. And in August, it hired a new head of its U.S. rates business from Bank of America.

Nomura is by no means alone in expecting the market’s one-way rally to go pear-shaped. With the S&P500 scaling new record heights on a regular basis, many investors see signs that the rally has pushed stocks, and speculation in them, to unsustainable extremes.

One concern is the revival of trading by retail investors in highly speculative “meme stocks.” The latest craze: shares in online property firm Opendoor Technologies, which have nearly quintupled this year and trading in which has accounted for up to 13% of daily volumes for the entire U.S. stock market.

Another warning sign: the SPAC is back. These special purpose acquisition vehicles were all the rage in 2020 and 2021 when interest rates were still near zero. Interest-rate increases put the SPAC boom to rest. But so far this year, SPACs have raised more than $20 billion, the most since 2021.

Then there’s the over-concentration that Nomura’s Willcox mentioned: the combined market capitalization of the so-called “Magnificent Seven” stocks—Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla—now represents a record high 37% of the S&P 500’s total value. That has many warning that the boom in all things AI-related is starting to smell like the dot-com bubble after sitting a few summer days in a car with the windows closed.

But a more practical and urgent concern may simply be that, with the U.S. government now shut down, investors are flying blind. It’s not so much that they need the U.S. executive, legislature, or judiciary—all of which have been rendered useless by partisan politics and demagoguery. It’s that the shutdown is disrupting the U.S. federal bureaucracy, and in particular the Bureau of Labor Statistics and its scheduled Friday release of the latest nonfarm payrolls figures.

Investors are waiting for those numbers to tell whether the job market is weakening enough to overcome the Federal Reserve’s concerns about persistent inflation to convince it to cut rates again this month. And not only investors: the Fed is waiting for those numbers. Without them, Chicago Federal Reserve President Austan Goolsbee said Tuesday, the Fed’s rate-setting committee will be forced to scrounge around for other data sources.

Investors had been at least 80% confident the Fed would cut rates this month and again in December. But after stronger-than-expected consumer spending prompted the U.S. Bureau of Economic Analysis to revise its estimate for second-quarter GDP growth up to 3.8% from 3.3%, that confidence dropped to about 60%. They’ve since regained their swagger and are about 75% confident in two 25 basis point cuts before the end of the year.

The BLS’ latest Job Openings and Labor Turnover Survey, or JOLTS, data didn’t help: job openings rose, but hiring fell. Layoffs also declined, leaving the ratio of job openings to unemployed workers lower—a sign the job market may be recovering. That’s bad news for the stock market, which wants the Fed to cut rates and so is rooting against the economy and the environment for earnings growth.