Goldman Sachs Warns Investors to Monitor Labor Market Data for Economic Cracks

Goldman Sachs trader Paolo Schiavone warns investors to watch for cracks in economic data that could threaten the stock market rally. He highlights labor market readings as pivotal and notes that workers losing their jobs have only a 45% chance of finding a new one, the weakest ever estimate. Schiavone argues that recession risks are underpriced and advises investors to track market patterns such as widening credit spreads and rising volatility. He believes the next 12 months will be about separating leading from lagging indicators.

Goldman Sachs Group Inc. macro trader Paolo Schiavone has advised investors to remain vigilant over the next 12 months to identify potential threats to the ongoing equity rally. Speaking to clients, Schiavone emphasized the importance of monitoring economic data, particularly labor market readings, which he believes could serve as early warning signs of an economic downturn Goldman Trader Urges Stock Investors to Watch for Cracks ...^[1].

According to Schiavone, the New York Federal Reserve's estimate that workers losing their jobs have only a 45% chance of finding a new one represents the weakest ever probability. This highlights the potential fragility of the labor market and underscores the need for investors to be cautious. Despite the record-breaking performance of the S&P 500, Schiavone has previously argued that recession risks are underpriced, and he is urging investors not to ignore potential cracks in the market Goldman Trader Urges Stock Investors to Watch for Cracks ...^[1].

Beyond labor market indicators, Schiavone has flagged several market patterns that could serve as warning signs. He has noted that while the VIX Index, a gauge of stock volatility, has trended lower from 2022 to 2024, it is now trending higher. Additionally, credit spreads are widening as risk premiums on loans adjust, and the pricing on inflation-protected Treasuries is opening a widening gap with an equity index measuring cyclicals versus defensives Goldman Trader Urges Stock Investors to Watch for Cracks ...^[1].

Schiavone believes that the next 12 months will be about distinguishing between leading and lagging indicators. He advises investors to focus on separating these to make informed decisions. "Low volatility only exists with low correlation or Goldilocks. Neither is in place," Schiavone said, emphasizing the importance of identifying and acting on leading indicators Goldman Trader Urges Stock Investors to Watch for Cracks ...^[1].

As the stock market continues to experience a record-breaking rally, investors are urged to heed Schiavone's advice and remain vigilant to potential threats in the economic data. By closely monitoring labor market readings and other market patterns, investors can better navigate the current market conditions and prepare for any potential shifts.