Anticipating the financial market’s reactions to economic data releases is like trying to follow a drunk driver. There’s little to no predictability but lots of lurches in both directions, and you might end up crashing and self-destructing.
A textbook example is the stock market’s bizarre response to Friday’s jobs report from the Bureau of Labor Statistics. The major large-cap stock indexes immediately dropped 1%, only to end the day 1.5% in the green.
It’s a day trader’s paradise, I suppose, but this type of behavior can be frustrating for sensible long-term investors. For one thing, the market completely ignored what would usually be considered the headline data point: the U.S. unemployment rate for September.
Economists expected 3.7% unemployment, while the actual result for September was 3.8%. That’s a slight miss, but it’s close and sometimes, good enough is considered good enough.
Evidently, stock investors bypassed that data point in order to focus on another one. Specifically, U.S. nonfarm payrolls increased by 336,000 in September, which is nearly twice the economists’ consensus estimate of 170,000.
My first takeaway from this is that some of these economists ought to be fired. Beyond that, I’d say there’s an excuse, in case the Federal Reserve didn’t already have one, to raise interest rates at the next FOMC meeting.
After all, the Fed doesn’t want a lot of people to be gainfully employed, since that means people will spend money and this could put upward pressure on inflation. Remember, Federal Reserve Chairman has made it abundantly clear that he wants 2% inflation whether it puts people out of work or not.
This line of reasoning is, I imagine, what prompted an early sell-off in stocks on Friday. After the release of the labor report, traders in the fed funds futures market raised the odds of an interest-rate hike before the end of the year to around 43% (though that’s a lowball estimate, if you ask me).
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Liz Ann Sonders, chief investment strategist at Charles Schwab, considered the monetary-policy implications of a surprisingly hot jobs market. “Clearly it’s moving up expectations that the Fed is not done… All else equal, it probably moves the start point for rate cuts, which has been a moving target, to later in 2024,” Sonders warned.
Particularly torrid in September was private-sector payrolls, which gained 263,000 for the month. This result was significantly higher than the forecast published earlier in the week by ADP, which indicated a private-sector payrolls increase of just 89,000.
By all logic, these employment stats should have sent bond yields higher and bond prices dropping. Treasury-bond prices are already in the gutter, while gold has comparatively held its value quite well.
Yet, seasoned investors know to expect the unexpected from the markets. After swooning lower, large-cap stocks suddenly turned around and leaped higher on Friday. Was there another data release from the federal government? Not at all; it was just the fickle market reconsidering its response to the jobs report.
Apparently, the market decided that a single month’s red-hot employment report equals a resilient U.S. economy. Completely ignoring the prospect of the Fed tightening the screws with more interest-rate hikes in 2023 and 2024, investors determined that the likelihood of a recession is now reduced because there are jobs available.
Of course, there have been jobs available for the entire year of 2023 – and these aren’t necessarily desirable, high-paying jobs, by the way. Nevertheless, large-cap stock investors felt that employed consumers are big spenders and therefore, a hard landing may be averted.
To that, I’d counter that if employed consumers are big spenders, they won’t be responsible savers. And again, a large-cap stock market that depended heavily on low interest rates is in a precarious predicament if the Fed continues to raise borrowing costs.
So, as usual, the market’s immediate reactions to data releases will only offer more questions than answers. Thankfully, sensible investors can circumvent the madness of crowds by diversifying their assets and maintaining a firm position in tangible assets with enduring value.
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