Strong Job Market = Stocks Down

Stocks dipped at the open on a better than expected jobs report (see below). Currently, the Dow is down 90 points, and the S&P 500 is down .7%. The VIX Index ticked up to 26.6, but certainly isn’t freaked out. And neither is gold, down about .15% in early trading. The bond market is little changed, but the Fed’s announcement later today could spike volatility. At the moment, Treasury bond prices are up modestly.

Payroll processor ADP says the US economy generated 239,000 net new jobs last month, which is considerably higher than expected. In this good-news-is-bad-news environment, the stock market reacted negatively. Investors worry that persistent labor market strength will prevent inflation from falling back to normal levels. Next week the Bureau of Labor Statistics will release the latest (October) inflation data, and economists predict the Consumer Price Index will barely budge from September’s 8.2% annual rate.

Later today the Federal Reserve’s key policy committee will wrap up its 2-day meeting with an interest rate decision and press conference. As I mentioned yesterday, we’ll likely see another .75% rate hike, which is already baked-in to both stock and bond markets. But investors’ great hope is that we’ll get some hint from Fed Chair Jerome Powell that he favors pausing further hikes if the economy looks to be weakening rapidly. I think this hope is misplaced. As Nicholas Colas of DataTrek Research puts it, Powell “is not really in any position to provide that just yet.” One reason is that the economy so far is holding up rather well. “For every sign the US economy is slowing (housing, commodity prices, retail sales ex-inflation) there are others that say labor market conditions remain strong.” It’s more likely that Powell will reiterate the Fed’s primary focus and mission to bring down inflation with continued tightening of monetary policy. In other words, he will stay on message.

So capital markets will continue this weekly back-and-forth we call volatility. Morgan Stanley’s Mike Wilson says the bear market isn’t over, but we’re closer to the end than the beginning. October’s rally suggests the stock market is beginning to sniff out a broad recovery some time next year. “My gut tells me” the market has more upside in this little rally, but the Fed could easily derail it with hawkishness. He’s guessing we’ll see continued choppiness in the near-term, then bottom in the first quarter of 2023. Of course, predicting and gaming out scenarios for the near future is rather iffy, so investors should focus on longer time spans. Looking out 12 months, he thinks stocks will be flat to higher than current levels. “We should be thinking, what do you want to own over the next two years, not two months.”