Friday’s jobs report still showed the economy is doing well, but stocks fell after the report and then recovered weakly afterward, as the market continues to equate good news with bad news.
The U.S. added 272,000 jobs in May, beating the 180,000 economists had predicted according to FactSet and above the revised April payroll figure of 165,000. Companies are still adding workers, but the pace is slowing.
In theory, stock prices should rise. But after the employment report was released, the three major indexes each fell 0.6%. It’s not just a few large stocks that are taking a breather from their recent gains. Equally weighted stock price averages are:
S&P 500,
The index, which best tracks average stock price performance, fell 0.7%. Losses have since eased, but the index is still in the red.
The problem is that the strength of the economy makes it less likely that the Fed will cut interest rates. Inflation remains above the Fed’s target. Plus, more people are getting new jobs and wages are rising. All of this makes it more difficult to contain inflation.
The probability of a July rate cut is now just under 9%, down from 21% on Thursday, according to federal funds futures market data from CME Group, reflecting a declining likelihood that a cut will actually occur, even as the market still expects several rate cuts this year.
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In agreement with that,
2-year government bond yield
The yield, a barometer of expectations for the federal funds rate, rose sharply on Friday to nearly 4.9% from about 4.7% just before the jobs report was released.
That means investors don’t want economic data to come in much better than expected, because that would mean the Fed will keep interest rates high for a long time — tightening monetary policy and ultimately slowing economic growth further in the future.
“In keeping with the ‘bad news is good news’ pattern, stocks fell at the open,” strategists at John Hancock Investment Management wrote. “The good news for the U.S. labor market means the Fed is likely to keep interest rates tight for an extended period of time.”
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The good news is that the bad news has temporarily faded this week. The Institute for Supply Chain Management’s Services Purchasing Managers’ Index, a measure of how well service-sector companies are prepared for demand, rose more than expected in May. That helped lift all three indexes on Wednesday, with the S&P 500 closing at a record high.
Importantly, the market liked stronger economic growth because the Fed has already signaled it’s prepared to keep interest rates high if necessary. Investors don’t want a prolonged period of disappointing economic growth and high interest rates, a combination that’s harmful to stocks. So the market liked the higher-than-expected level of economic activity.
But Friday was different. It showed that good economic news could still push stocks lower. The reality is that a prolonged period of rising interest rates will continue to hurt the economy, usually with a delayed impact. A recession is even possible. With stock indexes still up double digits from their October lows, markets need to reflect some of that risk.
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Indeed, the index recovered some of its losses on Friday, but the fact that its initial reaction was down speaks to the fact that the market still needs to reflect Fed-related and economic risks.
Email Jacob Sonenshine at jacob.sonenshine@barrons.com
