Tech to the Rescue! Your Money Oct 6 2023

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This week investors have been on pins and needles waiting for the all-important monthly job’s stats out of both the US and Canada. It has been driven by a dawning realization the US economy will not slide into a recession this year thus mitigating the need for central banks to cut rates. Meanwhile, Wall Street has been betting on no additional rate hikes since July with some speculating a cut before year end. For this vision to succeed, job growth must roll over, employment wage gains need to shrink, and inflation needs to continue to trend lower.

On Wednesday, ADP employment plunged from 180,000 new jobs in August to just 89,000 in September. More importantly, the analysts were expecting 150,000 new jobs. It set the stage for a 177-point gain on the tech heavy Nasdaq as computer generated algorithms jumped in with both wheels (computers don’t have feet) dragging day traders back on the bull band wagon.

And this is where we need to lift the proverbial curtains on how financial markets operate. We have two competing capital markets in North America, aka The Futures Exchange in Chicago and the Cash market in New York. At approximately 3am Pacific time Friday, Dow Futures were showing a 31-point gain, plus 4 for the S&P and plus 24 for the Nasdaq. More importantly the 10-year US Treasury was 4.73% according to the data sent to us from Dow Jones News Plus.

Not too unsurprising given the expectations the US economy would add just 158,000 jobs in September. It fit the theme of a soft landing and might be enough to stop the fed from raising interest rates again this year despite Mr. Powell signalling last month the necessity for another hike before 2024.

Flash forward to 5:30 am Pacific time when the nonfarm payrolls showed a gain of 336,000 new jobs for September. The futures markets went nuts driven by computer driven algorithm assessing the probability of a negative reaction to stronger economic growth and selling stock market futures ahead of the cash markets opening in New York at 6:30am.

In typical fashion, stock markets fell with “sell at the open” trades flushing stock prices lower. The Dow for example sold off 273 points and the tech heavy Nasdaq dropped 120 points. Not a complete surprise given the 10-year bond yield climbed to a record high of 4.88%.

But then a funny thing happened or maybe not if you are a portfolio manager and their traders that understand how capital markets operate. It is a combination of experience and intuition that has not yet been factored into AI driven computers.

If you know the algos and day traders are heading for the exit at 6:30 am and you have a shopping list of companies to buy, do you stand in at the open or step back and wait for the sell off and then buy? Its almost become a spectator’s sport for portfolio managers.

And if you think it only happens in New York, think again. At 7am this morning, from Thomson one the Reuters headline was “Canada Stocks-TSX set for third weekly loss as robust jobs data fuels rate hike fears”. It proceeded to describe the 147-point drop on the TSX due in part to Canada adding a surprising 63,800 jobs in September, three times the expected number.

No surprise our markets turned around shortly after that, joining the Dow and Nasdaq with a triple digit rally. The point we are trying to make is be aware of how the mechanics of the markets work and perhaps use them to your advantage when looking at daily swings in stock prices. Using market orders wisely can work to your advantage and recognize algorithms do not care what the price or value of a stock or index is because they make binary bets aka get in or get out. This is especially important in the first half hour and last half hour of trading.

We want to wish everyone a safe and happy thanksgiving and Canadian markets are closed Monday for the stat holiday.

Steve Bokor and the Ocean Wealth Team.

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Steve Bokor

Steve Bokor

Portfolio Manager