Summer brings new risks to Wall Street's fragile consensus: Morning Brief

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every Monday to Friday by 6:30 a.m. ET along with:

It’s June, and the summer doldrums have already arrived on Wall Street.

We might expect a few fireworks from the job numbers Friday morning, but this is the time of year when the tape trends quieter — on average.

But in a year that’s been anything other than average, the danger is that any shocks will be magnified, as investors scramble to reposition themselves in a shallow market.

Liquidity in both stocks and bonds is already running at multi-decade lows thanks to the secular trend in electronic trading.

As traders well know, liquidity only matters when you need it. But conversely — and, perhaps, perversely — it’s in the lowest supply when it’s needed the most. Like during a game-changing repricing of risk.

Right now, investors expect the Federal Reserve to stand pat later this month. But this conviction appears loosely held, with bets placed on another rate hike from the Fed as recently as last Friday. Fedspeak earlier this week flipped the odds back into the camp of those looking for a pause.

In the stock market, enthusiasm for AI and optimism that the earnings picture may turn out better than feared has boosted some of last year’s biggest losers and lifted investor spirits.

And Friday’s jobs report offers the potential to change the story for markets right now.

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A huge surge in employment could reverse expectations for the Fed’s next move. A surge in unemployment might do the same, just in the opposite direction. And with liquidity light, placing bets on these outcomes proves even more perilous.

There’s an old investing adage that says investors should, “Sell in May and go away,” reflecting the fact that many large investment shops will simply shutter their doors in early summer only to reemerge in September.

But this advice probably should have been, “Hedge in May and go away.”

On June 13, we’ll get the May consumer inflation report right before a another critical Fed meeting. Repeat the game theorizing exercise as appropriate — then do it for June, July, and August data.

What are the odds we don’t have a major surprise this summer given all the variables? Investors not prepared for this market environment may wish they had sold in May.

The bottom line for investors is that any deviation from the prevailing narrative — an admittedly loose and fluid phrase — could turn Wall Street’s positions on their heads in a massive pain trade.

A reversal even ChatGPT might not be able to undo.

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