A Pig-in-Lipstick of a Jobs Report

BY MICHAEL SALVATORE, EDITOR, TRADESMITH DAILY

In This Digest:

• The monthly snafu came early…
• Government data: a pig wearing lipstick…
• Why you still cannot ignore the bulletproof recession signal…
• The end of the 41-year bond bull market will break things…
• Trading chaos has never been easier…
• Find a strategy that works, then turn up the volume…

Liberation Day was not the peak of market chaos…

Last week showed us that markets are a fragile thing.

They rationally operate under understandings about current data and reasonable assumptions about future data. Prices meet the data where it is – sometimes with a lead, sometimes with a lag.

But as anyone who’s actually spent time trading will tell you, there’s an X factor to market moves that defies any pretense of rationality.

That X factor is, ironically, the most fundamental thing required for markets to work.

It’s people.

Flawed, emotional, impulsive people. Billions of them making decisions every single day… Each decision directly or indirectly nudging trillions in capital in countless directions.

The more powerful the person, the more impactful the decision.

And last week saw the world’s two most powerful people – multi-centi-billionaire Tesla CEO Elon Musk and President Donald Trump – have an intense, public breakup that put a heavy weight around the neck of the stock market. A 0.43% gain in the S&P 500 turned into a near 1% loss as it all played out.

I hope you weren’t sitting too cozy from the past month’s recovery. Because we’re not quite out of the woods yet.

Far beyond the drama, there are major pressures against the economy right now. That could spill over into stocks.

Does that mean you should move to cash and go risk off? No, it does not. You can and should keep your great stocks while selectively trading the best setups to the upside and downside.

That’s how chaotic times are best exploited.

And today we’ll show you how one of our newest members of TradeSmith, Jeff Clark, is trading this chaos to great effect right now.

But first, as we promised last week, let’s lay out the biggest problems facing stocks right now…

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Starting with that jobs report…

The headline number from Friday’s nonfarm payrolls was, on its face at least, pretty upbeat. From Bloomberg:

Nonfarm payrolls increased 139,000 last month after a combined 95,000 in downward revisions to the prior two months, according to Bureau of Labor Statistics data out Friday. The unemployment rate held at 4.2%, while wage growth accelerated.

The payrolls figure, which was slightly better than expectations, helps alleviate concerns of a rapid deterioration in labor demand as companies contend with higher costs related to tariffs and prospects of slower economic activity.

But like a pig wearing lipstick, you didn’t need to look too much closer to find some problems.

There were 95,000 fewer jobs in March and April than reported, continuing a long trend of major revisions in jobs data.

And there are even deeper signs of struggle.

One friend of mine, a former Department of Defense official who’s forgotten more about government data than I’ll ever learn (and who prefers to stay anonymous), shared his findings with me:

I’m having trouble finding the resilience in the jobs number. Participation rate fell 0.2% to 62.4%. The employment-population ratio fell 0.3% to 59.7%. The number of unemployed went up by 71K and the number of employed dropped by 696K. (Yes, there are almost 700K fewer people with jobs than there was a month ago.)

The rate stayed at 4.2% because 625K dropped out of the labor force. The number of job leavers reached a four-year low, so people with jobs aren’t overly optimistic.

YoY % change in wage growth (hours worked * average wages) is down from 5.54% in December to 4.12%. Good news for the Fed, since their goal is around 2.5%, but bad news for those with jobs since this indicates raises are falling.

Not related to the report, the Army reached its recruiting goal four months early. That is being attributed to surging patriotism. When I was in the military, we knew that recruitment was inversely correlated to jobs. When jobs were hard to find, we met recruitment goals early. It could be patriotism, but that hasn’t really been sufficient to fill the ranks in 250 years. In all that time, money and a poor economy were the primary motivators for entering the military.

One last note is the drop in full-time workers. There were 623,000 fewer full-time workers this month than last. Thankfully for the gig economy, part-time workers increased by 33,000.

Jobs data is deteriorating, albeit slowly, under the surface of the rosy headline print.

Investors may have celebrated it on Friday, with the S&P 500 up 1.17% as I write… But I’ll want to see some real follow-through above 6000 before I rush to get long.

Let’s zoom out even more…

One of the most cursed phrases in finance is “It’s different this time.” That’s what people tend to say right before they’re reminded it’s never different any time.

In the spirit of that, let’s look at a chart of the 10-year minus 3-month Treasury yield curve:

From October 2022 to December 2024, you could earn more loaning your money to the U.S. government for three months (buying 3-month T-bills) than you could loaning it for 10 years.

A kindergartner could tell you why this is fundamentally wrong. Longer duration equals greater risk equals higher expected reward.

This was the longest stretch of yield curve inversion on record. The next longest was back in the late 1970s, after a lost decade in stocks.

Things got back in whack, briefly, in January. Then the curve shot back down into a new mild inversion and has since disinverted again. The only other time we saw back-to-back yield curve disinversions was just before the pandemic.

More importantly, a recession has followed every single yield curve disinversion for the past 50 years.

Now, you could argue that the pandemic was the chief cause of the brief 2020 recession, and you’d probably be right.

But then you’re left with three options, none comfy.

1. Either it’s not different this time, and a recession is coming…
2. It is different this time, but a crisis on the level of COVID is coming…
3. Or it is actually different this time. And that commands much deeper thought about why.

There are many theories out there. But there’s one at top of mind right now for me…

And that’s the massive fiscal expansion of the last eight years…

From the start of the first Trump term, government debt as a percent of GDP has skyrocketed, starting just above 100% and climbing today to north of 120%:

Government spending and fiscal deficits have thus far been a great way to prop up the economy. It stimulates demand where it wouldn’t otherwise be.

That’s created a problem, however, in the form of long-term government bond yields.

As yields rise, the prices of bonds fall. We just exited a 41-year regime of falling bond yields and rising prices as the U.S. was the undisputed economic center of the world.

Everyone wanted the bonds because the U.S. represented safety. They were the key store of value starting in 1981, when yields peaked at 15%.

That changed when inflation came about in 2022 and long-term bonds started returning negative real yields. All of a sudden, the trillions of foreign investment in 30-year Treasurys started to slow down. Investors demanded higher yields, and so the 41-year bond bull market met its end.

Now, those higher yields are raising the interest expense on government debt, accounting for higher costs than the defense budget. That just makes a bad problem worse.

This is, at the same time, the reason the economy has not gone into recession and what threatens any coming weakness to be the most severe since the sideways market of the 1970s.

But Jeff Clark has a solution…

Anyone who’s spent some time in newsletter world knows Jeff Clark. He’s been sharing his trading ideas with subscribers for decades.

And we’re proud to welcome him as the newest expert joining us at TradeSmith.

I sat down with Jeff last week for a video interview where we broke down the types of trades he uses to thrive in market whiplash. If you haven’t watched it yet, make sure you check out that interview here.

Jeff has accurately predicted every volatile market period this century. That includes the 2008 crisis, the COVID crash, the 2022 bear market, and even the tariff scare in April of this year.

Now he’s making another prediction that the stock market could be heading for more trouble in the coming weeks and months.

But volatility is Jeff’s specialty. As a trader, times of market chaos are the best opportunities to make money.

In fact, since the Liberation Day crash in April, 16 out of Jeff’s 18 trades have been winners. Of those 16 wins, three were triple-digit gains, and most of the others were double-digit gains.

Each of those trades were signaled by a powerful combination of technical indicators. Looking back 10 years through the data, we found that long trades from these signals made money 72% of the time, with a 69% win rate on the short side. The winning trades made about 5.5% on average.

If you’re shrugging at that last number and saying, “So what?” then you need to know more about what Jeff does.

Jeff trades options. And when you trade options the right way – that is, without excessive leverage and proper risk management – they’re a fantastic way to turn small stock moves into big returns.

Trade these signals consistently, and you’re looking at a quick-hit moneymaker that you never have to turn off. It works in bears, bulls, sideways markets, and everything in between.

I think of it like scrubbing through the radio, passing through a wave of static… until you happen upon your favorite song. That’s the signal.

Then, you crank up the volume and roll down the windows – that’s trading the option to make the signal much more powerful.

On Wednesday at 10 a.m. Eastern, Jeff will share exactly how he does this to such great effect in his premium research service, Delta Report.

And how, with TradeSmith’s best-in-class financial tech, we’re now able to constantly share these signals in a daily updating scan in the TradeSmith Finance Dashboard.

For more details, and to sign up for this free event, click here now.

And be sure to sign up for Jeff’s VIP service for access to his live trading blog, Delta Direct, from now through Wednesday.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily