Good economic news is bad news for Wall Street, with stocks plunging on Friday due to concerns that the still-robust U.S. labor market makes a recession more likely.
The S&P 500 fell 1.8% in early trade on Friday after the government reported that firms recruited more people than expected last month.
Even while employment growth has slowed, the unemployment rate has fallen to a 50-year low, indicating that the labor market remains tight. Wall Street is afraid that the Federal Reserve may see this as evidence that the economy has not yet slowed sufficiently to bring inflation under control. This might pave the path for the central bank to continue raising interest rates, which, if done too quickly, could increase the likelihood of a recession.
According to Cornerstone Wealth’s chief investment officer, Cliff Hodge, the September employment report reaffirmed that the labor market remains tight and will put the Federal Reserve on track to continue aggressively tightening monetary policy. “We will continue to operate in an environment where good economic news is terrible market news.”
In morning trade, the Dow Jones Industrial Average slid 394 points, or 1.3%, to 29,532, while the Nasdaq composite fell 2%. The declines signaled a return to form for stocks, which have been sliding for the most of the year due to concerns about high inflation, rising interest rates, and the prospect of a recession.
Early in the week, Wall Street staged a strong but short-lived surge as some investors interpreted weaker-than-expected economic statistics as a sign that the Federal Reserve may ease off on rate hikes. However, Friday’s employment report may have dashed prospects for a “pivot” by the Fed, a trend that has occurred multiple times this year.
Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance, stated, “Ultimately, the direction of the stock market is likely to be lower because either the economy and corporate profits will slow significantly or the Fed will have to raise rates even higher and keep them higher for a longer period of time.”
He emphasized that both trends will exert pressure on business profitability and stock prices.
Last month, employers added 263,000 positions. This is a decrease from the 315,000 jobs added in July, but it is still greater than the 250,000 jobs predicted by economists.
Compression of salaries
For investors, it was also depressing that the jobless rate improved for the wrong reasons. Fewer unemployed individuals than normal are actively seeking employment. This is a continuation of a long-term pattern that might keep wages and inflation rising.
Where wages go has a significant impact on the Federal Reserve, which seeks to avoid a cycle in which higher worker wages cause corporations to increase product prices, which in turn increases inflation and increases workers’ demands for higher wages.
The employment report released on Friday revealed that the average monthly wage for workers grew 5% from a year ago. This is a decrease from August’s growth rate of 5.2%, but it is still possibly high enough to cause the Fed anxiety.
Matt Peron, director of research at Janus Henderson Investors, stated, “We are not yet out of the woods, but we should be getting closer as the effects of strong policy take root.”
Overall, many investors believe the employment report will keep the Federal Reserve on track to raise its main overnight interest rate by 0.75 percentage points next month. It would be the fourth such rise, which is three times the typical amount, and it would push the rate to a range of 3.75 to 4% after beginning the year at almost zero.
The Fed hopes that increasing interest rates will slow the economy and employment market. This will presumably deprive inflation of the necessary purchases to keep prices increasing further. Higher mortgage interest rates have negatively impacted the housing market in particular. If the Fed goes too far, the risk is that it will compress the economy into a recession.
In the interim, increased interest rates depress the prices of stocks, cryptocurrencies, and all other types of investments.
Treasury yields are increasing.
Treasury yields increased shortly after the announcement of the employment report, though they fluctuated little thereafter. The yield on the 10-year Treasury, which helps determine mortgage and other lending rates, increased to 3.89 percent late Thursday from 3.83 percent.
The two-year yield, which correlates more closely with Fed action expectations, increased to 4.30 percent from 4.20 percent.
Meanwhile, crude oil continued its rapid ascent and is on track for its largest weekly gain since March. The price of U.S. crude increased by 1.2% to $89.50 per barrel. Brent crude, the worldwide benchmark, climbed 1.2% to $95.54 a barrel.
Large oil-producing nations have vowed to reduce output in order to maintain high prices, which has caused a sharp increase in prices. This should maintain pressure on inflation, which is still close to a four-decade high but should presumably moderate.
Thursday brings the second monthly update on U.S. inflation. This is the next significant economic development that could influence the Fed’s interest rate decision on November 2.