Stocks fell Friday after a much stronger-than-expected jobs report – The Dow Jones Industrial Average fell nearly 700 points, or 1.6% to 41,938 – the Standard & Poor’s 500 Index declined 1.5% to 5,827 – the NASDAQ Composite dropped 1.6% to 19,162. For the week, the Dow and S&P each lost 1.9%, while the NASDAQ gave back 2.3%.
The catalyst behind the selloff was the U.S. Department of Labor’s jobs report showing the economy added 256,000 jobs last month, well ahead of market expectations for a gain of 155,000. Additionally, the unemployment rate unexpectedly improved a notch to 4.1%. Many of you may be wondering why the stock market would drop after good news on job gains and the unemployment rate, which is of course good for the economy (?). As we mentioned last week, the market was hoping for a Goldilocks number, not too cold that is shows a weakening economy, and not too hot that it increases worries about inflation and reduces expectations for interest rate cuts by the Federal Reserve. Well, the market perceived the number as too hot, and stock prices declined.
This occurrence is known in the world of Wall Street as good news is bad news. Good news on the economy and job front for Main Street often makes Wall Street worry that such strength may be inflationary and lead the Federal Reserve to alter the path of monetary policy. In the current setup, this means less or no interest rate cuts in 2025, with some market participants even anticipating the next move may be a hike in interest rates. Markets are now nearly certain the Fed will not cut rates when they meet later this month and put only a 18% chance on a rate cut in March – according to CME FedWatch. Market consensus expectations are now coalescing around the belief there will be only one interest rate cut in all of 2025. Remember, the stock market generally favors low interest rates and interest rate cuts.
Higher interest rates increase the cost of capital for companies and increase borrowing costs for consumers. Also, the higher bond yields provide more competition and act as a headwind for the stock market. The yield on the 10-year Treasury Note jumped to its highest level since 2023 after the jobs report and closed the week at 4.76 percent. Pertinent to this, is a fresh data point on inflation when the Consumer Price Index is released this week, which is a key variable impacting yields and Federal Reserve policy. Any surprise there, either positive or negative, will likely create more volatility in the stock market.
Also this week, get ready for the kickoff to earnings season! Major banks get things started, with JPMorgan Chase and Goldman Sachs reporting numbers. For this earnings season in aggregate (the fourth quarter of 2024) the estimated year-over-year earnings growth rate for the Standard & Poor’s 500 Index is 11.7%, if that is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth reported by the index since the fourth quarter of 2021, according to FactSet.
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All the best – Southport Station Financial Management, LLC