Good news about the economy means bad news for Wall Street, with stocks falling on Friday on concerns that a still-strong U.S. labor market may actually make a recession more likely.
The S&P 500 was 1.8% lower in early trading Friday after the government told employerslast month than economists expected.
Even as job growth slows, the unemployment rate has fallen to a 50-year low, signaling that the labor market remains tight. Wall Street fears the Federal Reserve could see that as evidence the economy has not yet slowed enough to bring inflation under control. This could clear the way for the central bank to raise interest rates further, raising the risk of causing a recession if done too aggressively.
“The September jobs report reinforced that the labor market remains tight and will keep the Fed on track for further aggressive monetary tightening,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “We will stay in the environment. where good news for the economy is bad for the markets.”
The Dow Jones Industrial Average was down 394 points, or 1.3%, at 29,532 in morning trading and the Nasdaq Composite was down 2%. The declines marked a return to form for stocks, which had mostly fallen all year on fears of high inflation, higher interest rates and the possibility of a recession.
Wall Street recovered a bit this week in a strong but short-lived rally after some investors turned a blind eye to some weaker-than-expected economic data to suggest the Fed might ease up on rate hikes. But Friday’s jobs report may have extinguished hopes for a Fed “pivot,” a pattern that has repeated itself several times this year.
“Ultimately, the direction of the stock market will likely be lower as either the economy and corporate earnings slow meaningfully, or the Fed will have to raise rates even higher and keep them higher for longer,” noted Chris Zaccarelli. chief investment officer of the Alliance of Independent Advisors.
Both trends will put pressure on corporate earnings and stock valuations, he noted.
Employers added 263,000 jobs last month. That’s a slowdown from the 315,000 hiring pace in July, but still more than the 250,000 economists had expected.
Pressure on wages
Investors were also discouraged that the unemployment rate improved for the wrong reasons. Among people who are not working, less people are actively looking for work than usual. This is a continuation of a long-term trend that could keep pressure on wage growth and inflation.
Where wages go has a big impact on the Fed, which wants to avoid a cycle where higher wages for workers lead firms to make their products more expensive, leading to higher inflation and even greater demands from workers for higher wages.
Friday’s employment report showed average wages for workers rose 5% last month from a year earlier. That’s a slowdown from August’s 5.2% growth, but still potentially high enough to worry the Fed.
“We’re not out of the woods yet, but we should be getting closer as the impact of aggressive policies begins to take effect,” said Matt Peron, director of research at Janus Henderson Investors.
Overall, many investors see the jobs data as keeping the Fed on track to raise the key overnight interest rate by 0.75 percentage point next month. It would be the fourth such increase, three times the usual amount, and would bring the rate to a range of 3.75% to 4% after starting the year at virtually zero.
The Fed hopes to slow the economy and the labor market by raising interest rates. This will hopefully starve the inflation of the purchases needed to further increase prices. This has already shown as higher mortgage rates have hurt the housing sector in particular. The risk is that if the Fed goes too far, it could push the economy into recession.
Meanwhile, higher rates are pushing down the prices of stocks, cryptocurrencies and all kinds of other investments.
Government bond yields are rising
Treasury revenue rose immediately after the jobs report was released, though it faltered a bit afterward. The yield on the 10-year Treasury note, which helps determine rates for mortgages and other loans, climbed to 3.89% from 3.83% late Thursday.
The two-year yield, which more closely tracks expectations for Fed action, rose to 4.30% from 4.26%.
Meanwhile, oil continued its sharp rally and is headed for its biggest weekly gain since March. Benchmark U.S. crude rose 1.2% to $89.50 a barrel. Brent crude, the international benchmark, rose 1.2% to $95.54.
They shot higher as major oil-producing countries pledged to cut production to keep prices up. This should keep pressure on inflation, which is still at nearly four-decade highs, but will hopefully moderate.
The next monthly update on US inflation will arrive on Thursday. That’s another major economic report that could change the Fed’s thinking on interest rates ahead of the upcoming November 2 decision.