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This morning, we got a pretty bad jobs report, yet the stock market went up. The U.S. added just 29,000 jobs in September, significantly below the roughly 90,000 economists expected.¹ The unemployment rate increased slightly to 4.2%, and July and August employment numbers were revised down by a combined 60,000 jobs.¹ Normally, you would think signs of a weakening job market would be bad news for stocks. Instead, the S&P 500 opened about 0.9% higher, while the Nasdaq rose roughly 1.2% following the report.² So why would bad economic news make investors happy? Interest rates, baby! The Federal Reserve has been trying to balance two things: keeping inflation under control without slowing the economy too much. When the economy and job market are very strong, the Fed has more room to keep interest rates high, in an effort to fight inflation. When the job market starts weakening, the Fed has to rethink. Raising rates makes borrowing more expensive for businesses and consumers and puts additional pressure on an already slowing economy. That is exactly how investors interpreted this jobs report. After the numbers came out, expectations for another Fed rate increase in October fell. Any indication of lower interest rates (or just not higher interest rates) can be good for stocks. The Fed might be looking for bad news, but we also don’t want to see that go too far. The stock market doesn’t actually want a terrible economy. There is a point where bad economic news becomes genuinely bad news for stocks. If unemployment were rising rapidly, consumers stopped spending and corporate earnings began falling, the possibility of lower interest rates might not be enough to offset the damage. Investors are hoping for a controlled slowdown; enough weakness to take some pressure off the Fed, but not enough weakness to significantly hurt corporate profits. The market isn’t celebrating people losing jobs. It’s looking several months ahead and asking a different question: What does today’s economic data mean for interest rates and, ultimately, corporate earnings? For now, investors seem to believe the economy can slow enough to take pressure off the Fed without slowing enough to derail earnings. Whether that balance holds is what I’ll be watching next. Sources
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Market perspective
So… a Bad Jobs Report Brings a Good Stock Market?
