We’ve seen US stocks sell two “weak” job reports now in the absence of more coherent sell signals, setting up the narrative that Wall Street is buckling up for a serious recession because the Fed stayed “higher for longer” than the economy could bear.

There’s a chance we’re in a slowdown like 1H22 now but nobody told the Atlanta Fed, which still thinks real GDP is rising 2.1% in the current quarter from last year.  So what’s really going on? Here’s the argument I made to Bloomberg over the weekend.

First and foremost, the 2022 “stealth recession” didn’t exactly trigger a market collapse. While the economy really did shrink a tiny bit across those first two quarters of the year, ambient inflation distorted the numbers a lot.

Remember, government economists call recessions based on real (inflation-adjusted) comparisons. When inflation is high, any uptick can make a boom feel like a bust. The economists didn’t even phone it in.

Unemployment is rising, don’t get me wrong. An overheated economy is cooling down under the frigid pressure of all those rate hikes, but we’re a long way from the deep freeze. The national rate has climbed to 4.2% . . . and before the pandemic we were staring down 4.4% inflation without much of a care in the world.

What does 4.2% feel like? It feels like 4Q 2017. It feels pretty close to the entirety of the dot-com boom from early 1999 until March 2001. And it’s a stronger job market based on that metric than anything in the near-two-decade period in between.

Of course the concern for investors is that we don’t know right now how cold it will get. But that’s what the Fed is now in position to manage. If the job market gets too cold for comfort, the rate cuts will get things moving again. No need to run and hide under the bed from that scenario.

And that’s exactly what the market is REALLY telling us when you look past the headlines. The S&P 500 is down 4.5% from its all-time high. Does that feel like institutional investors are running as fast as they can away from a severe recession?

That’s not even a correction. The Dow is down only 3%. “Defensive” and economically sensitive stocks are actually loving this.

The problem is that the NASDAQ has fully corrected. Mega Tech  is trading like it’s in a serious recession. The “real economy” is doing well.

This is a classic K-shaped market. And what’s driving the down leg of the K is as old-school as it gets: Mega Tech isn’t growing much faster than the broad market and those stocks are expensive. Better bargains elsewhere!

Consider: GOOG trades at 20X earnings (roughly on par with the market as a whole) and is on track to grow a little slower than the market as a whole in the coming year. Who pays the same price for a slower growth rate, especially with the company’s legal headaches on the horizon?

META isn’t growing any faster. It’s expensive at 23.5X earnings. Ditto AAPL, which still trades at 32X despite an anticipated 12% earnings growth rate.

And then there’s NVDA and TSLA, along with AMZN to some extent. Solid growth, the kind of story we expect from these companies after their years of massive outperformance. But they’re also expensive relative to the market.

Why reach for that when you can simply buy the S&P 500 and feel pretty good?

Meanwhile there’s $11 trillion parked in 5% cash (T bills, money markets, CDs) and that sweet yield starts going down once the Fed starts moving. All of that paper won’t roll over at once but consider: rate futures markets think we’ll get one 0.25 point cut every meeting for the coming year for a net 2 points of easing.

In that year, all paper and all CDs with a term of under 365 days will need to roll over at lower rates or roll into higher-paying instruments. Maybe that’s bonds. Sure. We’ll see what demand for long Treasury paper is like after the election.

It’s probably stocks. We did the math last easing cycle and every 25 bp cut gives SPY about 3 percentage points additional upside. That’s not “earnings growth” or “margin relief.” It’s just how the risk premium works.

But again, that’s the market as a whole. People moving out of cash will start small. They’ll grab household names at cheap valuations. Only then, when the valuation gap between them and Mega Tech has flattened out, will they hold their nose and reach for the Magnificent 7.