Markets take a breather as Oil rises on geopolitical risks

Stocks took a breather on Thursday, nothing dramatic—just a market repricing the geopolitical risk premium as higher oil prices and rising Treasury yields gave investors an excuse to lock in some profits.

At the end of the day The Dow lost 464 pts, the S&P down 20 pts, the Nasdaq lost 15 pts, the Russell gave up 19 pts, the Transports lost 150 pts, the Equal Weight S&P lost 17 pts while the Mag 7 added 85 pts.

Of the 11 S&P sectors – only 3 advanced…. energy up 1.5%, healthcare +0.2% and communications up 0.3%. The other 8 sectors ended the day lower – with basic materials, Industrials and real estate – leading the way all down 0.9%.

We saw more weakness in home builders – 1.9%, retailers down 1.7%, airlines lost 2.6%, disruptive tech down 0.6%, metals & miners lost 1.5%, cybersecurity names down 1.2%.

On the upside – semi’s rose 0.3%, big pharma was up 0.7% and all of the ‘contra trades’ ended the day higher…the PSQ + 0.35%, SH + 0.2%, DOG +0.9%, Triple Levered SPXS + 0.5%.

The only one that did not participate was the VIXY – it lost 1.2% and that is because the VIX (fear index) ended the day lower, down 4.2% -suggesting that the anxiety that we’ve seen out of the mid-east is beginning to be ‘less so’ – The broader market no longer appears to be reacting to every geo-political headline – which makes sense, right? Remember – political headlines are great at causing short term chaos (and opportunity) but rarely price stocks in the longer term.

So, what gives?

Oil pushed higher – WTI up 3% - even as Iran suggested a deal with Oman to reopen the Strait of Hormuz may be getting closer. Which makes you want to ask – ok – then why is oil up 3% and not down 3%? Great question and here is the answer….and it is specific to oil.

It is the renewed flare-up in geopolitical tensions – Iran and Oman are supposedly near a deal, but it leaves us asking will it actually reduce risks in the Strait of Hormuz.

Reports then emerged – that Iran is trying to restrict or prevent US and Israeli ships from using the Strait, while at the same time demanding compensation from countries it considers hostile. (conveniently undefined). Add reports of new military activity and suddenly the algo’s decided the geopolitical risk premium for oil wasn’t going away. Toss in the ongoing threats and attacks on the Saudis by the ‘Houthi’s – and BOOM….

At the same time, Treasuries got whacked. The TLT and TLH both lost about 0.6%, sending the 10-year Treasury yield up 5 bps to end the day at 4.66%. The 30 yr gained 4 bps to end the day yielding 5.21%.

Then came the economic data – which was more good than bad. Unit labor costs fell much more than expected (that’s good) while labor productivity surged (that’s good too) – exactly what the Fed wants to see. But instead of focusing on that, traders and the algo’s fixated on higher oil prices and rising yields. Remember - when in doubt, it’s easier to hit the SELL button and lock in some short-term profits than it is to stick around and wait for the dust to settle.

Now here’s the important part. Unit labor costs didn’t decline because workers are earning less. They declined because workers are becoming more productive. Businesses are generating more output per hour worked, which means the labor cost embedded in every product, every service, every dollar of GDP is falling. That’s (good) disinflation, it is NOT disinflation through layoffs or a recession, but through stronger productivity and improving efficiency. That’s a WIN - WIN for corporate America, consumers, and ultimately for the broader economy.

And here is what you really need to consider – if productivity is going up because AI driven efficiencies are finally beginning to show up in the data then this may be the first glimpse of a much bigger trend. Better productivity has ALWAYS been the best way to grow the economy without reigniting inflation.

But - THAT argument – the good economic data argument - fell on deaf ears and the algo’s and trader types decided to take money off the table – which is really not a surprise – considering the recent red hot rally…and don’t forget - They’re not investors – they are traders and they trade for mins or maybe hours, but never for weeks and months, never mind years as they try to capture fractions of a penny millions of times a day. It doesn’t sound like much—but those pennies become real money.

Now here’s the irony. The same AI that’s helping companies become more productive is also powering the trading systems that ignored the productivity story altogether. Now, isn’t that a slap in the face! Have you seen the Trutrade.io commercial? You don’t have to do anything – Their tag line says it all.

“Don’t Have Time? Don’t Have Trading Experience? IT DOESN’T MATTER!” (the understanding is that the computer does it all for you).

Ok – let’s move on……Yesterday’s earnings reinforced what we’ve been talking about all week.

The winners are the companies proving they can monetize AI—or supply the infrastructure that AI requires. The losers are the companies where investors expected more than management delivered. Memory chip makers perfect example…..(SNDK lost 6% while the DRAM ETF gave up 4.5%).

Cybersecurity is still growing, but not fast enough to justify premium multiples...FTNT lost 2.5% while the CIBR ETF lost 1.2%.

Meanwhile, energy companies continue to print cash, COP gained 1.5% and companies tied to power generation are benefiting from the massive electricity demand created by AI.

Today we will hear from UAA and TTWO – 2 non-events. The REAL story is the July NFP report – that hits the tape at 8:30. Here is what we expect - new jobs created – 80K, Unemployment remains at 4.2% - historically low, while Avg hourly earnings remain unchanged. The other data point will be the labor force participation rate – which is expected to be 61.6% up from 61.5% - why is it important?

The Labor Force Participation Rate measures the percentage of the civilian population age 16 and older that is either working or actively looking for work and is considered one of the best measures of the economy’s labor supply. If it rises, that’s generally good news. It means companies have a larger pool of workers to hire from, which helps keep ‘wage inflation’ in check. If participation falls, the labor pool shrinks. Employers have to compete harder for workers, wages rise, and that can keep ‘wage inflation’ elevated.

The sweet spot today? Anywhere between 70k – 100k new jobs, unemployment to hold steady at 4.2% and an increase in the labor force participation rate. If that happens - it would give Kevy and the FOMC committee one more reason to stay patient. More than 100k new jobs will be viewed as too strong, while less than 70k jobs would be considered soft. Just for perspective... the U.S. economy only needs to create about 35,000 jobs per month to keep pace with population growth and normal workforce turnover. Think of that as breakeven. At that level, the labor market is neither expanding nor shrinking.

And the KEY now – is yesterday’s productivity report changes the conversation again. If businesses are becoming more productive because of AI and technology, the economy doesn’t need to create 200,000 jobs a month to keep growing. Stronger productivity means that slower job growth can still support a healthy economy while helping to keep inflation under control.

This morning – oil is a bit lower – down 15 cts, bond yields are holding steady.

Gold...now that’s getting interesting. It has finally broken out of the trading range we’ve been stuck in for the past seven weeks. On Wednesday, gold pierced trendline resistance at $4,160 and then blasted through the upper end of the trading range we had identified around $4,200. This morning, it’s up another $73, trading near $4,312.

Now, yes... there’s still geopolitical anxiety in the Middle East, and yes, inflation remains part of the conversation. But this move is being driven by the breakout itself. Once we pierced resistance, the Momo guys and algo’s went to work - triggering additional buying and confirming what the charts had been saying for days. Resistance now becomes support. So, any pullback should find support in the $4,160-$4,200 with the upside at $4,500 (Long term trendline).

European markets are ticking higher – as we move into the weekend.

US futures are ticking a bit higher ahead of the NFP report…. Dow up 12 pts, S&P’s up 10, Nasdaq up 120 pts while the Russell is up 6.

The S&P 500 closed at 7,709 – down 14 pts. I think we need to churn a bit, right here before moving higher…The chart does suggest that we could test 7,900/ 8,000 before the end of the month….and remember – it is August, volumes are lower and that could amplify any move in either direrction….so Yes, it could happen, but we could retest 7,600 too. It will all depend on the data….

And that’s exactly why you need to stay disciplined and true to your plan. Let me remind you - chasing excitement has never been a successful investment strategy. Remember – you are invested. You are participating. Let the market work for you. Don’t get FOMO’ized – stick to your plan.

Chicken scarpariello (Serves 4–6)

Like investing, Scarpariello is all about diversity and balance. The richness of the chicken...the spice of the sausage...the acidity of the wine...the tang of the cherry peppers. On their own, each ingredient is good. Together, they become something unforgettable. That’s the beauty of both investing and cooking—you don’t judge the individual pieces. You appreciate how they work together.

For this you need: bone-in, skin-on chicken thighs (or a mix of thighs and drumsticks), s&p, olive oil, sweet Italian sausage, 1 large red & green bell pepper, sliced, 1 large onion, sliced, 5 cloves garlic, sliced, 8–10 cherry peppers, cut in half, 2 tbsp of the cherry pepper brine.

For the sauce- 1 cup dry white wine, 1 cup low-sodium chicken stock, butter, oregano, thyme, rosemary, Juice of ½ lemon, fresh parsley.

Begin by seasoning the chicken with s&p.

Heat olive oil in a large Dutch oven or cast-iron skillet. Brown the chicken skin-side down first until deep golden. About 5–6 minutes per side. Remove.

Next – cook the sausages in the same pan or better yet – grill the sausages. Don’t cook them completely. Slice each bite sized pieces. Set aside.

Now – add the onions and peppers – sauté for 5 minutes. Add garlic. Deglaze with white wine. Scrape up every bit on the bottom of the pan. Reduce by half.

Add chicken stock, oregano, thyme, rosemary, cherry peppers and pepper brine. Bring to a simmer.

Next – add back the chicken and sausage. Cover. Bake at 375°F for 35–40 minutes.

Remove lid. Cook another 15 minutes.

Finish with the butter & lemon juice and chopped parsley.

Taste and adjust s&p if needed.