More pain awaits stocks after massive jobs report

  • The Labor Department said on Friday that the US economy added 528,000 jobs in July.
  • This indicates that the labor market is still in good shape, and the Fed can proceed with its hawkish policies.
  • Many on Wall Street said Friday that this is bad news for stocks.

On Tuesday, the President of the Federal Reserve Bank of San Francisco Mary Daly I went in LinkedIn Live Streaming With CNBC’s John Fort and they sent a firm message: the central bank is “nowhere near” to tightening.

Some say Dali’s outspokenness was too deliberate. The Federal Reserve pulled out one of its most notorious doves to retract what many investors considered lousy comments from Jerome Powell at the July Federal Open Market Committee meeting the previous week.

Markets began to doubt the Fed’s intention to tighten and were inhaling a pivot point ahead. The shares have continued to rise from mid-June.

With the advent of Daly, “they’re telegraphing the market, in essence, recalculating,” said Quincy Crosby, chief global strategist at LBL Financial.

Daly’s comments were followed by similar statements from other Fed chairs, including Charles Evans, Loretta Meester and James Bullard in what was seen as a concerted effort to dispel any notion that the Fed was willing to travel with an olive branch to investors.

Early Friday morning before the market opened, the pivotal cautious narrative was completely shattered as the Labor Department announced a gruesome jobs report. The The United States added 528,000 more jobs in JulyThey said more than double the expected number.

A strong jobs report is usually positive for the economy. More jobs means the economy is in a healthy place – when people have jobs, they spend money, and that supports corporate profits.

But with inflation surging to a 41-year high of 9.1%, markets have looked at the robust labor market through at least a partially negative lens. The Fed is fighting inflation aggressively by raising interest rates at the fastest pace since 1994 and reducing the amount of assets it owns.

A tight labor market is likely to continue to fuel demand and thus inflationary pressures. He also points out to the Federal Reserve that it has not yet done damage to the labor market with its hawkish policies, so that it can proceed as it was without caution.

Ultimately, Uber’s hard-line policy is inevitable to catch up with the economy – and thus stocks. In addition, liquidity in the financial system is drying up thanks to Fed tightening not good for risky assets like stocks.

That’s why the market fell on Friday morning in reaction to the jobs report. Many on Wall Street say there are more downsides to come.

Why Stocks Aren’t Out of the Woods Yet

Steve Sosnick, chief strategist at Interactive Brokers, said he expects the S&P 500 to fall and retest June lows around 3666, 11% from current levels around 4130.

Sosnik said the volatility in the short-term bond market that followed since June tells him there is further decline in stocks, which have been strong over the same period.

“If the bond market can’t come to a consensus on short-term interest rates, how can the stock market be sure to change its consensus,” he said, arguing that bond traders have a “purer” view of monetary policy. Trending from stock traders. “If risk-free assets are volatile, how can you not expect volatility in risk-free assets, such as stocks,” Sosnik said. “These are the messages the bond market is screaming at us.”

Crosby also said it sees up to a 10% drop in the S&P 500. More selling is ahead, and now the Fed is likely to raise rates by 75 basis points, said John Lynch, CIO at Comerica Wealth Management. At the September meeting. , what is the third height of this size in a row.

“Wage growth is alarming to Fed officials, and is likely to bring 75 basis points back to the September meeting table. Fed fund futures are already trending higher,” Lynch said in a statement on Friday. “We believe this development marks the end of the recent bear market rally.”

Matt Byron, director of research at Janus Henderson, echoed those sentiments, too, saying that stocks “are not yet out of the woods.”

The severity of the potential sell-off appears to depend on whether inflation slows rapidly, or on the ability of the US economy to fight off a recession in the face of the tighter environment in decades. Or – if stagnation is unavoidable – how mild it is.

Jason English, an analyst at Goldman Sachs, said in a webinar last week that… The United States is in a unique position to fight recession Due to the large number of jobs currently available (10.7 million) and the relatively high net worth of consumers.

But in such an unusual environment, no stock scenario should be ruled out, Sosnik said, including a volume correction of something close to 40%.

“I refuse to take any scenario off the table,” Sosnik said. “None of the Fed governors have seen this in their careers. Only major investors have seen this in their careers.”

He added, “The few times the Fed tried to pull liquidity from the market, things didn’t go well. They were able to stop the cash withdrawal because inflation wasn’t a problem.”