This week’s headline news event was the Friday jobs report, and everybody knew it.

However, it isn’t really the employment number that’s driving the current market in the short or intermediate term. Most market participants know this too.

Recently, Deutsche Bank asked investors to rank their biggest risk factor for the market in 2025.

As you’ll see from the results below, the four biggest concerns were clearly.

1. A global trade war
2. Tech valuations plunge / AI enthusiasm wanes
3. Central banks hike unexpectedly as inflation remains sticky
4. Bond yields rise more than expected

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Three of those four concerns have a common thread – inflation expectations.

As a result, the market looked at Friday’s employment data through the lens of, “What’s it going to mean for inflation?”

With that point of view, the stronger than expected employment data gets translated into expectations that there will be continued upward pressure on inflation and interest rates. Additionally, it will be less likely that the Fed will continue to cut rates in the near term.

Right now, that expectation pushes long bonds lower (rates higher) and pressures stocks to move lower.

Last week, the major stock indexes succumbed to the pressure of higher rates and moved lower. This should not come as a surprise since this is a continuation of a pattern that has clearly existed since December.

Later in this article, you’ll find a chart that clearly shows how the path of the stock market over the last 5 years has followed inflation expectations. This is likely to continue for the foreseeable future.

However, this relationship is also dependent on the bond market which has short and long-term trends.

Currently, the stock market is in a high-risk zone in the short term with respect to this relationship, and you can see it playing out in the charts below.

In the chart below, all the red arrows begin on the 16^th because the QQQ topped out on December 16^th, approximately a week after the SPY and about a week after TLT resumed an existing downtrend with a vengeance.

The red and green dotted lines mark the high and low of the first day of the year, which provides context for people paying attention to the calendar ranges.

Note that with the exception of January 2nd, the TLT has made a new low every day this year. With the bonds (TLT) in a strong bearish market phase (price under the 50-day, which is under the 200-day), the acceleration of that trend is bearish for stocks.

Of course, “bearish for stocks” is a broad statement, so be sure to watch Keith’s weekly market analysis video and review the charts and bullets in Big View to see which segments of the market are most vulnerable, and if the market internals, sentiment or other factors present reasons to expect a technical bottom to form.

What Next?

This upcoming week is filled with the most widely watched inflation news. On Tuesday, we’ll get the PPI report, and on Wednesday, the CPI.

The important trends (above) are at levels and in trends that could lead to a big reaction in either direction.

The Good News

Even before we get the upcoming inflation data, the news situation and news flow are not all bearish.

In fact, Ed Yardeni produced the chart below suggesting that if you look at the market from the long-term perspective, that marks the beginning of the current secular bull market at 2010, and then compare it to the beginning of the secular bull market that began in 1980, we’re tracking it quite well. There’s even room to be optimistic even if we don’t experience an internet bubble 2.0.

What Does The Market Need to Get Back on Track?

Here’s the good news. It’s the same as the bad news. The economy is strong, but not “overheating.”

Let’s not forget that it is possible for inflation to exist in an environment of weak economic growth. Fortunately, we’re not there.

Earnings season will get underway in a few weeks, and if there is one thing that can bring the bulls into a market, it’s good earnings and optimistic earnings guidance.

Therefore, earnings season will be a very important factor in which areas of the market remain strong.

Additionally, the inauguration of President Trump will begin to shed light on the reality of the biggest concern on investors' minds, according to the survey above: changes to global trade policies, which will inevitably shape inflation expectations.

Trade policy can take years to take shape, but the market will not take that long to price in its opinion.

Markets will always overshoot to the upside when investors get optimistic and then correct when bearish news rains on the enthusiasm.

The inflation fears are real – rising rates confirm that. Meanwhile, the enthusiasm over Trump 2.0 is rapidly getting closer to reality, and if there is one thing that the new administration is not bringing to the market in the short run it’s “predictability”.

Markets don’t like uncertainty, trade wars or expectations of higher inflation with rising rates. It sounds like we should expect stock market weakness until the market gets oversold and finds its footing on what appears to be a solid economic outlook with growing corporate earnings.

If you’d like to follow the logic in the form of a chart, consider this view below that describes these market relationships over the last 5 years.

Below you’ll see how inflation fueled interest rate moves mark the major turns in stocks at each of the vertical red lines.

Of course, the narrative of the market at each one of these turning points wasn’t so obviously “inflation made me do it”, but when you strip away the noise of the news there’s message every investor should see, hear, and listen for going forward.

Interest rates will not always travel in the same direction as stocks, and higher rates are not always bearish for stocks, but when inflation expectations and rates are accelerating in the same direction look out for stocks to move accordingly.

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Of course there are a lot of short-term moves that go counter to these primary trends and that’s where good risk management and tactical trading can make a big difference.

I hope this makes the inflation reports a little more interesting for you this week.

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