You knew it was coming, right? After marching steadily higher, day after day, for the past five weeks, the bears finally got back in the game on the back of a shockingly weak jobs report.

To be sure, the stock market was "set up" for some kind of decline, pullback, correction, and/or sloppy period. Remember trees (even those powered by AI) don't grow to the sky - well not for long, anyway. No, usually Ms. Market's game is a "two steps forward and one step back" type of affair. Even during the best of times, something usually comes out of the woodwork to encourage bouts of selling every once in a while.

So, with most every oscillator screaming that stocks were overbought, sentiment measures having moved into the "extreme" optimism zone, volatility indicators plumbing recent lows, our "Early Warning" indicator board acting like a kid at the back of the class that knows the answer to the teacher's question, and valuations at or near historic highs, experienced investors knew that something, at some point, would crop up to halt the recent trend.

The "something" this time around was obvious. Just when the bulls had convinced us that the economy was defying all economists' warnings regarding the impact of tariffs on inflation and economic growth, and that the good 'ol USofA was simply humming along, we got a "say what?" report from the Labor Department.

It's The Economy...

On it's own, the headline number of new jobs created during the month of July (73,000 versus 115,000 consensus expectations) wasn't too bad. And the fact that the Unemployment Rate ticked higher to 4.2% normally wouldn't cause much of stir in markets. However, when we learned that the new jobs actually created in May and June were revised lower by... wait for it... a whopping 258,000, traders started clicking the sell button early and often.

The headlines came quickly, blaming "Macro Growth Concerns" for the swift decline in both stock prices and bond yields. Suddenly everyone forgot about the "holy cow" earnings reports from META (META) and Mr. Softee (MSFT), which made it abundantly clear that the AI hater crowd is on the wrong side of what is happening in the computing revolution. No, traders quickly went into freak-out mode and assumed the economic worries that had been all but dismissed recently, were back.

To be fair, the signs of some economic slowdown have been fairly obvious to anyone keeping score at home. In addition to Friday's Nonfarm Payrolls data, we learned last week that the hiring rate in the June JOLTS Job Opening report hit a seven-month low. The ISM Manufacturing reading reminded us that the contraction in the manufacturing sector continued in July and that costs are still moving in the wrong direction.

Speaking of inflation, we should note that the Core PCE Inflation reading accelerated on an annual basis in June. Not to the disturbing degree seen after the pandemic-induced supply chain shocks, but the trend is not heading in the right direction at the moment.

And then of course, there was the seemingly endless headlines about tariffs, tariff threats, and the various trade deals. All of which include higher costs that somebody, somewhere will have to pay.

Taken individually, none of the above would typically cause a market meltdown. But when you mix all the bad news with a market that is set up for a pullback, well, a pullback is what typically occurs.

The question now is if Friday's freakout narrative has legs. Will traders continue to pound on stocks that have enjoyed stellar runs so far this year? Will the bears' macro view supplant the strong earnings seen in the leading tech names? Will worries about inflation and the economy cause retail investors to stop buying and sit on their hands?

The Good News

Before you run out and sell all of your stock holdings in anticipation of impending economic doom, it is important to keep in mind that (a) the bears have been dead wrong about the economy/inflation for many moons now and (b) there just might be a silver lining here.

You see, it is worth noting that Ms. Market's Wall Street minions love easy monetary policy (i.e. Fed rate cuts). And one of the bullish takeaways from the headlines touting economic weakness is that the odds for rate cuts starting in September have surged.

According to the CME's FedWatch Tool, the probability of a 25bp rate cut at the September 17 FOMC meeting stands at 85.5% on this fine Monday morning. In addition, the odds of another rate cut in October currently sits at 64%. Put another way, the odds that the Fed will NOT cut between now and the end of the year is just 0.7%.

The thinking seems to be if the Fed does cut rates a couple/few times before the end of this year, the resulting monetary stimulus could offset the current economic softness. Remember, low rates encourage growth in many areas of the economy. And then with the potential for an uber-dovish Fed Chair taking over in the first half of 2026, it can be argued that the FOMC may stay "easy" for longer than currently expected.

Sloppiness is to be Expected

But... This bullish argument is merely conjecture at this point and NOT a reason to put the pedal to the metal here. Lest we forget, history shows that August/September is historically the weakest two-month period of the year. And our trusty Cycle Composite (a Ned Davis Research creation that combines all the 1-year, 4-year, and 10-year cycles since early 1900) suggests that the S&P 500 will move sideways in a moderately tight range until early November.

As such, I for one am expecting some "sloppiness" in the market for a while here. Think of it as an argument between the bulls and bears. Or a period of consolidation/digestion as we get more clarity on the outlook for the future. Don't get me wrong, I will continue to keep my seat on the bull train for the foreseeable future. However, given the state of valuations and the uncertainty surrounding tariffs, inflation, and economic growth, a period of sloppy/sideways action in the near-term suits me just fine.

Thought for the Day:

"It's a beautiful day, don't let it get away" -Bono

Wishing you green screens and all the best for a great day,

David D. Moenning
Founder, Chief Investment Officer
Heritage Capital Research, a Registered Investment Advisor

Disclosures

At the time of publication, Mr. Moenning held long positions in the following securities mentioned: META, MSFT - Note that positions may change at any time.

NOT INDIVIDUAL INVESTMENT ADVICE. IMPORTANT FURTHER DISCLOSURES