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Investing.com -- Goldman Sachs macro trader Paolo Schiavone recommends investors buy the September dip in stocks, predicting the S&P 500 could reach 6700-6900 as the market recognizes that rate cuts will fuel economic re-acceleration.
In a note published before the latest jobs data was published, Schiavone explains that the next rate-cutting cycle is already being priced into financial conditions indexes, which will lead to renewed economic growth.
The U.S. economy added just 22,000 jobs in August, well below the 75,000 expected. The unemployment rate edged up to 4.3%, in line with forecasts. The dollar weakened following the report, while Treasury yields moved lower while stocks were up.
Schiavone expects the Federal Reserve to eventually settle around 3%, similar to the European Central Bank’s steady state.
The trader notes that while asset prices have decoupled from economic prices over the past 15 years - creating "strong discomfort" with stretched valuations in both credit and stocks - this trend will continue, albeit at a slower pace. This valuation concern represents only a minor factor in his overall investment framework.
Schiavone suggests investors should own rates volatility as more term premia are needed, and buy equity dips tactically. He advises watching Nasdaq and Russell indexes for confirmation signals.
The trader also expresses some caution regarding a new regime of fiscal dominance where central banks lose independence, which could push rates higher at the front end and increase stagflation risks. He points out that leverage currently sits in government balance sheets rather than with corporations or households.
Looking ahead, Schiavone emphasizes that economic data must "carry the load."