Against Nasty Non-farm Payroll, How Can US Stocks Still Marching to New Highs?

"Unrestrained fiscal and monetary easing policies catering to voters, accompanied by a gradually softening Federal Reserve, are likely to correspond with a bull market in assets such as gold and virtual assets, which serve as alternatives to the dollar. Meanwhile, funds from U.S. Treasuries (which, in this scenario, have become de facto net issuances and rampant assets) are continuously moving into the stock market, where corporate stock buybacks prevent equity assets from becoming overly abundant and relatively scarce."

Hello everyone, I'm Dolphin Research!

The earnings season is finally coming to an end, and the long-awaited strategy weekly report is back! During this period, Powell's interest rate policy at the Jackson Hole meeting took a dramatic turn, and U.S. stocks surged and then retreated. The key question now is, as we enter September, can U.S. stocks reach new highs?

I. "Transformed" New Employment: Is it Political Maneuvering or Genuine Employment Decline?

In the past two months, the U.S. economy has been "bombing" at the beginning of each month. In August, the first non-farm data release was another "performance" moment:

a. Only 22,000 new jobs were added in August;

b. Historical data was revised downward again, with June employment directly revised down by 27,000, further adjusted to a rare net loss of 13,000 jobs, marking the first employment contraction since December 2020. Additionally, July was slightly revised upward by 6,000, from 73,000 to 79,000, with a total downward revision of 21,000 over the past two months;

c. Besent also mentioned that last year's employment data (from April 2024 to March 2025) might face an overall downward revision of 800,000;

Meanwhile, from a detailed structural perspective: if an economy experiences continuous layoffs across multiple industries such as mining, construction, manufacturing, wholesale, information technology, and public services for three consecutive months, it is likely already in a quagmire, and the U.S. employment data over the past three months reflects this scenario. In August, positive growth was mainly seen in retail services (primarily daily goods retail), healthcare, and the catering industry.

Regardless of the actual feeling, the reliability of labor data has been significantly compromised with the dismissal of the Bureau of Labor Statistics director and the deputy director taking over as acting director. Especially during such substantial downward revisions:

a. The wage growth of private non-farm payrolls has not significantly stepped down from the 2024 base;

b. The weekly working hours of private non-farm payrolls have only gradually and slowly stepped down;

These two items form a stark contrast with the "plunge" in non-farm employment numbers since April.

Interestingly, after the back-and-forth adjustments of August's non-farm employment, the unemployment rate is rising, but overall it still falls at a relatively healthy 4.3%. This unemployment rate level, historically speaking, is still relatively healthy.

The combination of rapidly declining new employment and still relatively healthy unemployment rate data conveys a very clear message: although current employment data is healthy, if no action is taken (such as rate cuts), employment will decrease further, and the unemployment rate will soon become unfavorable.

Looking at the dual mission of the Federal Reserve—maximum employment and desired inflation level:

a. The CPI balance is marginally rising, with a 0.32% month-on-month increase in August, but considering tariff factors, it's not exaggerated;

b. New non-farm employment has already plummeted: if 80,000-100,000 is considered a reasonable level of new employment, the average of 27,000 new jobs over the past four months is clearly below the baseline of reasonable employment.

These two missions encounter contradictions, as presented in Powell's press conference logic—under poor employment conditions, it is difficult for the employment expectation to improve—wages rise—inflation rises—employees demand raises, leading to a spiral of wage and inflation increases.

The risk of self-fulfilling inflation is reduced, making the Federal Reserve's primary goal to rescue employment, achieving a "perfect landing" from hawk to dove, seemingly without compromising the independence and credibility of the Federal Reserve as a global central bank.

However, when the "data-driven" Federal Reserve decision-making system becomes data that has been repeatedly revised and deliberately fed, does the Federal Reserve ultimately become a "soulless" model robot?

Therefore, with such employment data, the market interpretation becomes quite interesting:

a. Recession Theory: Normally, with such poor employment data, the economy is definitely in trouble, and rate cuts indicate a recession outlook.

b. Soft Landing: For the latest employment data, qualitative information is taken rather than quantitative information—that is, employment continues to weaken, combined with stable indicators such as micro-level individual stock performance, macro-level consumption, investment, and wage indicators, the judgment is that the economy is experiencing a soft landing. These new employment data merely confirm that the Federal Reserve will cut rates to ensure a soft landing.

Clearly, the current market still believes that the economy is not heading towards a recession. Despite the poor employment data, the market opened high and closed low, with growth sectors like Nasdaq still achieving positive returns, and U.S. stocks are still hovering at new highs, indicating that funds believe in the prospect combination of monetary rate cuts + fiscal easing + economic soft landing in 2026, with the interim maneuvers being preludes to the bright future of 2026.

II. U.S. Treasuries: Concentrated Issuance and Liquidity Drain in September

In the past two weeks, the Treasury's TGA account balance has significantly accelerated its rebuilding, reaching 660 billion by the week of September 3rd. At this rebuilding pace, it is expected to reach the target of 850 billion by the end of September.

In the past five weeks of TGA account rebuilding, it is evident that the main consumption is the bank deposit reserves and reverse repo balances previously mentioned by Dolphin Research, but the overall progress is relatively moderate and slow.

However, it can also be seen that after a month of rebuilding, although the reverse repo rate remains relatively stable, the reverse repo balance has been almost completely depleted, and the current reverse repo proportion has returned to pre-pandemic levels.

If the first half of the bank reserve balance remains largely unchanged, the latter half of the TGA rebuilding may primarily consume the bank reserve balance. In fact, last week's TGA rebound was almost entirely supplemented by the bank reserve balance.

When primarily using bank reserves for supplementation, the short-term inverse relationship between the stock market and bank reserve balances may become relatively apparent. Therefore, even if the TGA rebuilding under Besent's operation is relatively moderate and friendly, the market cannot rule out the short-term liquidity risks brought about by this process.

From the changes in the Federal Reserve's total assets, it can also be seen that due to the limited remaining space of reverse repo balances, bank deposit reserves are already being rapidly consumed, and the net issuance of U.S. Treasuries in August reached the second-highest level since June 2023, with the S&P 500 index hovering at high levels.

From a short-term game perspective:

a. Positive: On September 17th, there is a Federal Reserve "rate cut" meeting, and some people have already started to think that a 50 basis point cut is needed. However, with current PPI rising and CPI not being low, a 25 basis point cut is still a high probability event, although positive, it has been fully anticipated;

b. Negative: Large-scale issuance and liquidity drain, consuming bank reserves.

Considering both, Dolphin Research still leans towards September being a flat month with U.S. stocks hovering at high levels. However, without an unexpected rate cut, if the market adjusts in the latter half of September due to the realization of rate cut benefits and U.S. Treasury liquidity drain, it is necessary to focus on opportunities in quality assets from a long-term perspective.

After all, looking slightly further ahead, regardless of what the U.S. says externally, it is actually about to implement a sustained easing policy:

1) After the 2008 economic crisis, the U.S. government rescued the economy, and in the following years, it at least tried to bring the GDP's water content (represented by M2/quarterly annualized GDP) back to historical normal levels.

2) Unlike the massive liquidity injection in 2008, the 2020 pandemic liquidity injection was followed by a shallow attempt to withdraw liquidity. At present, when the GDP "water content" is still far above historical normal levels (red arrow in the chart below), the U.S. government is visibly preparing for a new round of fiscal and monetary stimulus.

Unrestrained fiscal and monetary easing policies catering to voters, accompanied by a gradually softening Federal Reserve, are likely to correspond with a bull market in assets such as gold and virtual assets, which serve as alternatives to the dollar. Meanwhile, funds from U.S. Treasuries (which, in this scenario, have become de facto net issuances and rampant assets) are continuously moving into the stock market, where corporate stock buybacks prevent equity assets from becoming overly abundant and relatively scarce.

III. Portfolio Returns

Last week, Dolphin Research's virtual portfolio Alpha Dolphin did not adjust its positions. It rose by 1.9% during the week, matching the MSCI China Index, outperforming Hang Seng Tech (+0.2%), S&P 500 (+0.3%), and CSI 300 (-0.8%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 104%, with an excess return of 89% compared to MSCI China. From an asset net value perspective, Dolphin Research's initial virtual asset of 100 million USD has exceeded 207 million USD as of last weekend.

IV. Individual Stock Profit and Loss Contribution

Last week, Dolphin Research's virtual portfolio Alpha Dolphin outperformed the market index mainly due to heavy positions in TSMC, Pinduoduo, and Google, which faced case risk resolution. Additionally, the continuous rise in gold under rate cut expectations also contributed significantly to the index.

Specific stock price movements are explained as follows:

V. Asset Portfolio Distribution

The Alpha Dolphin virtual portfolio holds a total of 18 stocks and equity ETFs, with 7 standard allocations and the rest underweighted. Assets outside of equity are mainly distributed in gold, U.S. Treasuries, and USD cash, with the current ratio between equity assets and defensive assets like gold/U.S. Treasuries/cash being approximately 54:46.

As of last weekend, the Alpha Dolphin asset allocation distribution and equity asset holding weights are as follows: