More pain ahead for stocks after huge jobs report

  • The US economy added 528,000 jobs in July, the Labor Department said on Friday.
  • This indicates that the labor market remains in good shape and that the Fed can proceed with aggressive policies.
  • That’s bad news for stocks, many on Wall Street said Friday.

On Tuesday, the president of the San Francisco Fed mary daly it was in a LinkedIn Live Stream with CNBC’s Jon Fortt and sent a strong message: the central bank is “not done” with tightening policy.

Daly’s candor was very deliberate, some say. The Fed brought out one of its most notorious doves to walk back what many investors had perceived as insipid comments by Jerome Powell at the July meeting of the Federal Open Market Committee the previous week.

Markets were beginning to doubt the Fed’s resolve to tighten and were scenting a pivot ahead. Stocks continued their rally since mid-June.

With Daly’s appearance, “they are telegraphing to the market, in essence, recalculate,” said Quincy Krosby, chief global strategist at LPL Financial.

Daly’s comments were followed by similar statements from other Fed chairmen, including Charles Evans, Loretta Mester and James Bullard, in what was seen as a coordinated effort to dispel any notions that the Fed was ready to blow up a branch of olive tree for investors.

Early Friday morning, before the market opened, the bearish pivot narrative came crashing down completely when the Department of Labor announced a monstrous jobs report. the The United States had added another 528,000 jobs in Julythey said, more than double the expected number.

A strong employment report is usually positive for the economy. More jobs mean the economy is in a healthy place: when people have jobs, they spend money, and this supports corporate profits.

But with inflation at a 41-year high of 9.1%, markets viewed the strong labor market through an at least partially negative lens. The Fed has been aggressively fighting inflation by raising interest rates at the fastest pace since 1994 and reducing the amount of assets they own.

A tight labor market is likely to continue to fuel demand and thus inflationary pressures. It also tells the Fed that they are not yet hurting the labor market with their aggressive policies, so they can proceed as before without caution.

Eventually, the super-aggressive policy is bound to catch up with the economy and thus stocks. Also, the depletion of liquidity in the financial system thanks to the Fed’s tightening is not good for risky assets like stocks.

That is why the market fell on Friday morning in reaction to the jobs report. And more trouble lies ahead, say many on Wall Street.

Why stocks are ‘not out of the woods yet’

Steve Sosnick, chief strategist at Interactive Brokers, said he expects the S&P 500 to drop and retest June lows around 3,666, down 11% from current levels around 4,130.

Sosnick said the volatility in the short-term bond market that has occurred since June tells him more declines are coming in stocks, which have been strong over the same period.

“If the bond market can’t come to a consensus on short-term rates, how can the stock market be so sure of changing its consensus?” he said, arguing that bond traders have far more insight. pure” where is the monetary policy. targets stock traders. “If risk-free assets are volatile, how can you not expect volatility in risky assets like stocks?” Sosnick said. “Those are the messages that the bond market is screaming in our faces.”

Krosby also said he sees up to 10% more decline in the S&P 500. John Lynch, the CIO of Comerica Wealth Management, said more selling is coming and the Fed is more likely to raise rates by 75 basis points in its September meeting. , which would be his third consecutive walk of that size.

“Wage growth is alarming for Fed officials, likely putting 75 basis points back on the table for the September meeting. Fed funds futures are already rising,” Lynch said in a statement on Monday. Friday. “We believe this development signals the end of the recent bear market rally.”

Matt Peron, the research director at Janus Henderson, also echoed these sentiments, saying the stock is “not out of the woods yet.”

The severity of a potential sell-off appears to depend on whether inflation cools quickly or the ability of the US economy to fight a recession in the face of the most aggressive environment in decades. Or, if a recession cannot be avoided, how mild it is.

Goldman Sachs analyst Jason English said in a webinar last week that the The United States is in a unique position to fight a recession given the large number of jobs available right now (10.7 million) and the relatively high net worths of consumers.

But in such an unusual environment, no scenario should be ruled out for stocks, Sosnick said, including a correction of the magnitude of around 40%.

“I refuse to take any scenario off the table,” Sosnick said. “None of the Fed governors have seen this in their professional lives. Only older investors have seen this during their careers.”

He added: “The few times the Fed has tried to withdraw liquidity from the market, it hasn’t gone well. They have been able to stop withdrawing liquidity because inflation was not an issue.”

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