That Strong Jobs Report Isn’t Good News For Stocks

That Strong Jobs Report Isn’t Good News For Stocks
Stéphane Renevier, CFA

over 1 year ago2 mins

The US economy added a whopping 528k new jobs in July, more than double what economists were expecting at a time when the word “recession” was on everyone’s lips. And if that sounds like great news for the economy, it might not be such great news for stocks. Here’s why.

The Federal Reserve (the Fed) has been raising interest rates at unprecedented speed this year to try to cool the economy and the country’s red-hot inflation. And over the past two weeks, investors had started to bet that inflation had already peaked. That would allow the Fed to ease up on some of those rate hikes, which would be a positive for stocks, particularly to rate-sensitive ones like tech stocks.

But the data released Friday – the US Labor Department’s closely watched non-farm payrolls report – is pouring cold water on those expectations. With the job market this hot and inflation still roasting, the Fed has little choice but to keep hiking. Remember, the Fed’s got a two-pronged mandate: maximum employment and price stability. With employment under control, that leaves bringing inflation down as the Fed’s No.1 target. And as we wrote here, that may not happen as fast as investors expect.

Now of course, there is one scenario that could still slow those hikes and push stocks higher: the so-called soft landing. This is the scenario in which we see a short, shallow slowdown in economic activity – and eventually in the labor market – that’s sufficient to bring inflation lower and allow the Fed to pivot, giving a boost to stocks in the process. But the latest look at the labor market suggests that scenario is very much a long shot – with more jobs out there than available workers, and with salaries growing, which, in turn, contribute to further inflation…

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