Employment Crisis Deepens: How Will Markets Respond? | Adam Kobeissi

The labor market is showing signs of weakening, with declining job postings and a decrease in aggregate weekly hours worked, though this is viewed as cyclical rather than a catastrophic recession. This weakness, combined with inflation still above the Federal Reserve's 2% target, creates a complex economic environment where wage growth may not outpace inflation. Despite this, the stock market, including assets like gold and Bitcoin, has reached new highs, driven by factors like AI investment and the expectation of Fed rate cuts.

The market's upward trend is supported by significant AI capital expenditures and anticipated easier monetary policy. Historically, when the Fed begins cutting interest rates with the S&P 500 near record highs, the market has seen substantial gains in the following year, with an average increase of around 15%. Retail investors have been actively participating in this rally, while institutional investors are now re-engaging, suggesting continued market strength, albeit with potential for near-term pullbacks.

The concentration of market capitalization in the top 10 tech stocks is a notable trend, with these companies driving the current market performance. While this concentration is alarming, the underlying innovation in AI by these leading tech firms suggests continued growth potential. Looking ahead, the housing market shows resilience with soaring new home sales, driven by a constrained supply and a desire among homeowners with low mortgage rates to hold onto their properties.

• The labor market is weakening cyclically, not signaling a 2008-style recession, with youth underemployment at 17% and overall underemployment above 8%.
• Inflation remains above the Fed's 2% target, near 3%, which, coupled with a weakening labor market, could lead to real wages not outpacing inflation.
• The S&P 500 is predicted to reach near 7500 next year, supported by robust AI capex, Fed rate cuts, and inflation above 3%, creating a search for yield in assets like gold, Bitcoin, and equities.
• Historically, in 100% of cases since 1996 where the Fed began cutting rates with the S&P 500 near record highs, the market has ended higher one year later, averaging a 15% gain.
• New home sales have surged 20.5% in August to a three-year high, driven by falling mortgage rates and a constrained supply, leading to expectations of higher home prices.

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Labor Market Weakness and Underemployment [1:44]

• The labor market is weakening, with job openings declining and aggregate weekly hours worked falling by 0.22% over the last three months, the largest decline since the 2020 pandemic.
• Underemployment is a growing concern, with the three-month average of youth underemployment at 17%, near 2001 and 2008 levels, and over 8% for the entire economy.
• This weakness is described as cyclical, exacerbated by AI disruption and technological advancements, rather than indicative of a massive recession.

"I think right now what's happening is it's no secret the housing the sorry, the labor market is weakening."

This section details the speaker's view on the current state of the labor market, highlighting its cyclical weakness and the contributing factors of AI and underemployment.

Inflation and Wages [3:50]

• Inflation is still running above 3% on some metrics, exceeding the Fed's 2% target.
• While the labor market is weakening, wages are not expected to go down but may not outpace inflation in the near term.
• This creates a potential for stagflation, where there is weakness in the labor market with higher inflation.

"It will be interesting to see what's going to happen with wages. I don't necessarily think wages are going to go down, but they probably won't outpace inflation over the near term."

The discussion here focuses on the delicate balance between inflation and wage growth in the current economic climate.

Asset Performance and Market Sentiment [5:04]

• Despite economic data showing weakness, assets like Bitcoin, gold, and stocks, including the S&P 500, have reached new all-time highs.
• Gold has outperformed the S&P 500 year-to-date, which is unusual as they typically move inversely.
• This performance is attributed to the market anticipating easier monetary policy from the Fed, as the Fed's dual mandate of controlling inflation and unemployment is conflicting.

"And I think even the last few weeks have kind of proven that. The initial reaction to the Fed meeting, we're seeing all assets. I mean, gold is up four times as much as the S&P 500 amid an S&P 500 bull market year to date."

This part of the conversation explores the disconnect between economic indicators and asset performance, explaining the market's forward-looking behavior.

S&P 500 Outlook and Historical Precedents [8:44]

• A projection of the S&P 500 reaching close to 7500 next year is presented as a base case assumption.
• This projection is based on historical data showing that in 100% of cases since 1996 where the Fed began cutting interest rates with the S&P 500 near record highs, the market has ended higher 12 months later, averaging a 15% gain.
• Robust AI capex, especially from tech giants, and easier monetary policy are expected to continue driving equities higher.

"And in 100% of cases where this has happened over the last 40 years we've actually or or close to 50 years actually we've actually seen the S&P 500 end higher one year 12 months later and that's usually an average gain and Morgan Stanley put out a note on this as well saying the average gain is roughly 15%."

The speaker elaborates on the rationale behind a bullish S&P 500 outlook, citing historical patterns and current economic drivers.

Retail Investor Activity [11:10]

• Retail investors have significantly increased their purchases in the stock market, with weekly purchases being the largest since December and four times above the 2020-2024 daily average.
• This surge in retail buying is occurring while institutional investors have also begun making large net purchases after initially selling and shorting.
• The speaker views this not as a sign of a market top, but rather as a reflection of strong market performance that is driving down cash levels for both retail and institutional investors.

"Now, if you look at institutional flows during this same time period, retail was actually right. A lot of institutions were not only selling but shorting into what has been now one of the best five-month rallies in the in the history of the S&P 500."

This section analyzes the behavior of retail investors and its implications for the broader market trend.

The AI Boom and Technological Revolution [14:43]

• The ongoing AI revolution is considered the biggest technological revolution since the internet, driving significant capital expenditures from major tech companies.
• This technological push is seen as a primary driver for equities to continue moving higher.
• The speaker believes that AI has a lot more room to climb, with potential for companies like Nvidia to become trillion-dollar entities.

"And and by the way, you're also have in the background the biggest technological revolution since the internet, which is AI."

The speaker discusses the profound impact of AI on the economy and its role in driving market growth.

Concentration Risk in Tech Stocks [14:56]

• The top 10 stocks now represent a record 41% of the S&P 500's market cap, indicating that tech stocks are effectively the stock market.
• While this concentration is a concern, the speaker believes the companies driving this trend are those that are evolving the global technology and business landscape.
• Investors in S&P 500 index funds have significant exposure to these large tech names, but this is not viewed as inherently bearish or bullish, but rather a trend to be aware of.

"This is a great chart because if you take a look th I mean retail has absolutely crushed this rally. If you look at uh let's just go right back to April and and right when we were in that that tariff crash, retail was basically buying all the way into that that spot and even after that spot, it's been pretty consistent uh net inflows by retail investors."

This part addresses the concentration of wealth in a few large tech companies and its implications for the market.

Fed Policy and Potential Disappointment [17:23]

• The market is currently pricing in preemptive Fed rate cuts.
• A hypothetical scenario where the Fed disappoints by not cutting rates as much as expected could lead to a significant blowback, with yields rising and stocks falling.
• However, with Powell's term as Fed chair ending in May 2026 and the likelihood of a replacement aligned with lowering interest rates, the market is expected to continue pricing in cuts.

"Right now the market is pricing in cuts preemptively. Um if the Fed decided to come out and say, you know, we're we're not cutting interest rates at all for the next year until we see inflation back to 2% or whatever variation of that it may be, that would absolutely uh you know, send send yields higher, send stocks lower."

The discussion centers on the market's expectations for Fed policy and the potential consequences if those expectations are not met.

Inflationary Environment and Fed Actions [20:22]

• 72% of CPI components are surging faster than the Fed's 2% target, the highest share in three years.
• Cutting rates into a rising inflationary environment could displease the public, though the administration might deflect blame.
• The Fed faces a delicate balance, as inflation risks are to the upside while employment risks are to the downside.

"72% of CPI components are now surging faster than the Fed's 2% target, the highest share in three years."

This section highlights the challenge of managing inflation while considering labor market conditions and potential Fed rate cuts.

Economic Outlook for Assets [26:41]

• Stocks are predicted to head higher, and gold is also seen as a strong performer, with a target of $4,000 plus.
• Commodity markets, particularly oil, are noted as interesting, though influenced by the administration's desire to keep prices lower.
• Bitcoin is expected to remain strong, with potential for more record highs and reaching $150,000 by year-end, as investors continue to search for yield.

"Um, you know, F Fox Business always calls me the world's youngest gold bull and um, we, you know, we were calling for 3500 and then now we're nearly at 3,800."

The speaker provides a forecast for various asset classes, including stocks, gold, oil, and Bitcoin, in the current economic environment.

Bond Market and Deficit Spending [28:42]

• The speaker has not been chasing the recent bond rally, with the 10-year yield moving back towards 4%.
• Deficit spending is described as out of control, with the year-to-date fiscal 2025 deficit at two trillion dollars.
• The continuous supply of Treasuries to fund deficit spending, coupled with high inflation, is expected to prevent a significant drop in yields.

"The year-to-date fiscal 2025 deficit is at two trillion. Um, we're, you know, we saw the deficit exceed 300 billion in August, uh, and nearly 300 in July."

This segment focuses on the bond market, explaining why a substantial decline in yields is unlikely due to government deficit spending.

Generational Interest in Gold vs. AI and Crypto [29:33]

• While gold has seen significant gains (100% in two years), the younger crowd is primarily fixated on AI and crypto.
• Those who follow markets closely and seek portfolio diversity are increasingly considering gold, even physical gold.
• Gold is still considered a hedge, despite a high correlation with the S&P 500 and other risky assets.

"No. Yes. Here and there. I I would say, you know, the young crowd is fixated on on two things, AI and crypto."

The speaker discusses the level of interest in gold among younger investors compared to their focus on AI and cryptocurrencies.

The AI Revolution's Trajectory [31:02]

• The speaker believes there is a lot more room for growth in the AI sector, considering it to be in its early stages.
• The potential for companies like Nvidia to become trillion-dollar entities is highlighted.
• While some call AI a bubble, it's argued that two things can be true simultaneously: it can be a bubble and the next big thing, similar to the internet's trajectory.

"I personally think that we are we have a lot more room to climb. I think we're in the early days of AI."

This section addresses the ongoing AI boom and its potential for sustained growth, distinguishing between a bubble and a transformative technology.

Tech Valuations and AI Companies [32:32]

• Valuations for companies like Nvidia and other "Mag 7" names are not considered as speculative due to substantial investment and proven revenue.
• Smaller cap or niche AI companies may be overhyped and resemble a bubble.
• Even if the sector is in a bubble, it could have considerable room to run before popping, as seen with the internet bubble.

"If you get into the more small cap space or the more niche AI, you know, things that we're seeing, yeah, I mean, there's definitely some things that are probably overhyped that could be, you know, resembling of a of a bubble."

The speaker differentiates between established AI tech giants and smaller, potentially overvalued AI startups.

Housing Market Dynamics [33:44]

• New home sales surged 20% in August to a three-year high, driven by a temporary drop in mortgage rates after the Fed's rate cut.
• Existing home prices are now above new home prices, and new inventory constitutes one-third of homes for sale.
• A constrained supply, coupled with moderately increasing mortgage demand and historically low interest rates for existing homeowners, is expected to lead to higher home prices.

"And you have interest rates coming down a little bit, enough to to drive some more demand, but not enough to remove what I like to call the financial dis disincentive for current home owners and and investors more specifically to sell property."

This part of the conversation analyzes the current state of the housing market, focusing on new sales, supply constraints, and mortgage rate impacts.