It's certainly true that in certain time periods the relationship between the financial markets and the real economy gets pretty wonky. Maybe the best example is early in bull markets when bad economic news is interpreted as being bullish for stocks because it implies an increased chance, size, and duration of monetary and fiscal stimulus.
Currently, we are in a similar moment but in an inverse way which we haven't experienced in decades. In essence, the strong and resilient economy is bearish for the stock market, because it implies more rate hikes and higher rates for longer.
Thus, the stock market had a major decline following the unemployment claims data and ended the week with a decisive break from the mid-June lows. The S&P 500
It's actually quite remarkable that the labor market continues to strengthen. In fact, unemployment claims came in at 193,000 which was a new low for the recovery. Thus, it's clear that the Federal Reserve's hiking is not having any impact on the labor market, yet.
In most normal circumstances, this is an unquestionable positive. But, this is a time when the Fed has a monomaniacal focus on curbing inflation. And, wage growth is a big contributor to inflation. Thus, the Fed wants to see some weakness in the labor market and a modest rise in the unemployment rate as an indication that its policy is achieving its goals. In public speeches, FOMC officials have said the ideal outcome would be the number of job openings going down which would lead to a less 'hot' labor market.
Even more confounding is the lack of a clear bullish catalyst, other than the market getting extremely oversold. However, we've seen the market embark on big bounces that roll over multiple times due to this catalyst.
For a true bottom or even a bear market rally, there needs to be some fundamental catalyst that is meaningful in the sense of implying lower rates or a significant jump in the earnings growth trajectory.
As evidence, the 18% rally from mid-June to early August was powered by a better than expected Q2 earnings season, economic data that was at odds with an incoming recession, and softness in inflation data that raised hopes of a Fed pivot.
Of course, the latter part of this case crumbled due to a 'hot' August CPI report which reset the Fed's timetable and criteria for hiking and resulted in short-term and long-term rates hitting new multi-decade highs.
