Markets are entering September with mixed signals everywhere. Jobs growth is slowing, the unemployment rate has ticked higher, and the yield curve remains deeply inverted. Historically, these are classic signs that the economy is late in the cycle.
But here’s the twist, weak jobs doesn’t automatically mean the selloff starts now.
In fact, history suggests we could see one last powerful risk-on rally in stocks and indices before the risk-off phase begins. The question is: has the Fed waited too long to act?
Weak Jobs Data: Are we Already in Recession?
The latest BLS payroll data shows that only 48% of industries added jobs in the past six months, the lowest reading since the pandemic. That’s significant because, historically, when job growth dips below 50%, the economy is either already in recession or about to enter one.
At the same time, the unemployment rate has risen 0.9% above its cycle low. Going back to 1945, every single time this has happened, a recession followed soon after.
This is not a guarantee the downturn starts tomorrow. But it sets the stage: the job market is losing momentum, consumers are getting cautious, and the Fed now has a tougher decision to make.
The Fed’s Dilemma: Is It Too Late to Cut Rates?
The Federal Reserve is preparing to start cutting rates after one of the most aggressive tightening cycles in history. But here’s the problem, history shows that once the Fed begins easing, it’s often too late to avoid a slowdown.
The Federal Reserve Economic Data (FRED) chart on historical rate cycles tells the story:
- In 2001, the Fed slashed rates aggressively, but the dot-com crash still happened.
- In 2007, cuts came fast, but the financial crisis was unavoidable.
- In both cases, equities initially rallied hard, only to collapse months later.
If the Fed cuts in September, it may trigger another short-term risk-on move as traders price in cheaper money and liquidity. But if jobs keep weakening and earnings fall behind, the recession signal gets louder.
Risk-On Before Risk-Off: Why Stocks Could Still Rally
Here’s where things get interesting. Historically, the first phase of Fed easing has often triggered a powerful rally in equities before the downturn starts.
This happens because markets front-run liquidity:
- Lower rates make borrowing cheaper.
- Growth-sensitive sectors like tech, small caps, and risky stocks often surge.
- Institutional flows pile in, pushing valuations higher, even when fundamentals are deteriorating.
This “relief rally” can be sharp and parabolic, similar to late 2007 or early 2019. However, the sustainability of that move depends on one thing: whether economic growth can stabilize fast enough.
The Yield Curve’s Warning
One of the most reliable recession indicators: the 10-year minus 2-year yield curve, has now been inverted for over two years. Historically, the longer the inversion, the deeper the following recession.
The chart shows a consistent pattern:
- Early 1990s: Inversion → slowdown.
- 2000: Inversion → dotcom bust.
- 2007: Inversion → Global Financial Crisis.
Today, we’ve had one of the longest inversion streaks in history, meaning the market’s current optimism may clash head-on with macro reality later.
The Bigger Picture: Has the Fed Missed Its Window?
The central question traders are asking: Was the Fed too late this time?
- If cuts come too soon, inflation could reignite and the Fed loses credibility.
- If cuts come too late, the economy may already be slipping into contraction.
This late-cycle dilemma often creates mixed market signals, strong rallies in equities, even as underlying data points toward economic weakness. That’s where we are today.
Key Takeaways for Traders
For traders, the message is clear: short-term risk-on rallies can still play out even as recession signals pile up.
Weak jobs data, yield curve inversions, and rising unemployment suggest the Fed may be late to act, and historically, that has often preceded downturns.
However, markets don’t move in straight lines. Before a true risk-off phase begins, stocks and indices could still push higher as investors front-run potential rate cuts. Staying alert to positioning, liquidity flows, and upcoming Fed signals will be key in navigating what could be a highly volatile few months.
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