Inside Markets — Rotation

Cyclical equity groups are overbought and consolidating recent gains rather than selling off. The Russell 2000 (RTY)/NDX performance ratio has pulled back below the YTD base pattern at 0.116 (now 0.114) but remains in an intermediate uptrend. On its own, the cyclically-sensitive RTY has already broken above its two-year base pattern but we’re using the RTY/NDX index ratio as a gauge to evaluate the staying power of the rotation. Sustained closing levels north of 0.116 would constitute a pattern breakout and increase our conviction in a cyclically led rally in H1’25 – possibly at the expense of richly valued secular growth stocks.

It’s widely accepted that the October Jobs Report (released 11/1 with non-farm payroll gains of only 12,000) was distorted by hurricane and strike impacts. The unwinding of these distortions has investors are looking for the November Jobs Report (released this Friday) to provide a more accurate reading of underlying labor market conditions. Most economists are adding back +125,000 jobs to reverse the impact of hurricane Helene/Milton and the BA strike. Consensus is now looking for non-farm payroll gains of +215,000, which is more like a below trend +90,000 addition without the adjustment. Non-farm payrolls averaged +180,000 over the preceding four months (June-September), so something north of +300,000 this Friday is likely required to change December rate cut expectations.

Yesterday’s November ISM manufacturing survey surprised to the upside at 48.4 vs. consensus for 47.5. The index remains in contraction territory, but given the rise in small-business optimism following election results, it’s logical to assume an eventual break above 50 sometime in H1’25. Also recall that ISM surveys from September-October indicated that some companies had delayed hiring and capex decisions due to election uncertainty. If unwinding that uncertainty gets you higher ISMs and a lower Unemployment Rate (below 4%), we should expect higher for longer bond yields + curve steepening.