Why Didn’t the Stock Markets Fall on Friday’s Blowout Jobs Report?
While the Bond Markets Took the News to Heart
Usually, the markets have fallen lately when the Friday jobs report came in with ever-increasing employment. That’s because it usually means the Fed will delay cutting interest rates even longer because pesky inflation remains sticky. Higher rates for longer generally increase the risk of the Fed breaking something and such a mess would be followed closely by a recession. But not Friday April 5, 2024.
No, this blowout jobs report of 303,000 new jobs (www.bls.gov) being added to the economy—far exceeding the expected 200,000 new jobs, in March wasn’t followed by a big sell-off. https://www.investopedia.com/march-2024-jobs-report-preview-8623194. The bellwether S&P 500 had a midday high of +1.37% and closed at +1.11% while the NASDAQ closed up 1.24%. Ycharts.com. The Dow ended up 0.80%. The Russell 2000 remained unchanged. Id.
The up-close for the NASDAQ was especially surprising since it is tech-heavy with growth companies who need cash and capital (and lots of it) to feed their growth. And with overnight interest rates remaining at 5.25% (ycharts.com), that capital isn’t coming cheap compared to just a short while ago. So what gives with the Street’s optimism? Can stocks continue to rise in light of further delayed Fed rate cuts?
April 5, 2024’s nonfarm payroll employment rose by 303,000 but unemployment fell from 3.9% in February to 3.8%. www.bls.gov. Job gains occurred in health care, government, and construction. But here’s the kicker: average hourly earnings fell to 4.1% year-over-year in March—down from February’s 4.3%! That means that, although the economy is growing, wage inflation is slowing. The expectancy is that data will soon translate into lower prices overall in the CPI. That next release is set for April 10, 2024. February’s CPI report showed a 0.44% up-tick over January, 2024’s number.
Stocks can shrug off the interest rate cut delay because the strong data show the economy is robust and continues to grow with lower inflation. That information means that a recession is less likely to occur. But that same news doesn’t necessarily translate as linearly into the bond markets.
Bond markets didn’t react quite so well to the news, however. The 5Y Treasury jumped 60 basis points. Ycharts.com. The 10Y Note jumped 52 basis points. Id. The 30Y Treasury jumped 44 basis points. Id. 1 basis point equals 1/100 of 1 percent. www.investopedia.com. And since bond yields move opposite bond prices (see id.), that means money must flow into shorter duration fixed income investments in order to experience appropriate returns while waiting for the next round of interest rate cuts. Fed Chairman Jerome Powell has been clear that he’d like to see 3 cuts in 2024 and a strong labor market isn’t a concern if price pressures are moderating. But he also made clear that the Fed would have patience for the evidence to prove inflation is cooling towards its 2% goal. See www.usnews.com/news/economy/articles/2024-04-03/powell-reiterates-that-interest-rate-cuts-are-still-likely-in-2024.
What did we do?
We continue to pace equities exposure commensurate with our clients’ expressed risk tolerances, Strong economic news continues to support a thesis of maintaining appropriate equity exposure to build on past equity gains.
Meanwhile in fixed income exposure, we continue to shift maturing positions into those with more flexible duration to allow us to pivot easily should the economic news worsen. Such a strategy also improves liquidity for clients nearing or having already entered retirement.
What Can Go Wrong?
Gold climbed to a record high and oil maintained a five-month high as Mid-East rumors of war keep those markets on edge. One Fed official questioned the wisdom of cutting interest rates at all in 2024 causing the Dow to have its worst day since March 2023 on Thursday. In case the Fed’s progress against inflation stalls, we can pivot current growth equity positions into alternative investments (often contrarian in style). We’ve already discussed our intentions in terms of pivoting in fixed income exposure.
The Takeaway
I leave you with this thought: There are always waves in the ocean as we press onwards to our destination. Smooth waters can be deceiving and frequently lead to complacency. Complacency can dull our enthusiasm for searching out what we don’t yet know. And discovering what we don’t know is the most important key to success. There’s a reason we all like either some form of theatrical drama or athletic competition. Embrace the bumps, enjoy the ride, and actively seek growth, improvement, and challenges!