Stocks displayed a moment of hesitation this morning as the trading community digested the latest U.S. jobs report, capping off a week that had otherwise been a winner. The Dow Jones Industrial Average barely moved the needle, edging up by 14 points or 0.01%. The S&P 500 dipped by 0.1%, while the Nasdaq Composite took a modest hit, sliding 0.3%.
Earlier today, it appeared that the major averages were destined for more substantial gains. The Dow at one point vaulted upwards by over 250 points, while both the S&P 500 and Nasdaq momentarily soared 0.8%. On a weekly basis, the S&P 500 and Dow clocked gains of 2% and 1% respectively, putting them on track for their most significant weekly upswing since July. The Nasdaq wasn’t far behind, surging almost 3% for the week.
The spotlight was firmly on the latest U.S. nonfarm payrolls data, which threw a curveball at expectations. The unemployment rate ticked up to 3.8% for August, its highest in more than a year, defying forecasts of a steady 3.5%. Average hourly earnings grew 4.29% YoY, falling short of the 4.4% anticipated rise. “We’re seeing the soft landing that the market has been looking for,” said Ed Yardeni, president of Yardeni Research. “The market is reacting exactly as everyone anticipated it would; it’s rallying on the news that things are slowing down, which is good news.”
The CME Group’s FedWatch tool, in the wake of the job data, suggested a 91% likelihood that the Federal Reserve will keep interest rates steady in its upcoming policy meeting.
“The U.S. labor market continues to come back to earth but from a very high peak,” observed Nick Bunker, head of economic research at the Indeed Hiring Lab. “The labor market was sprinting last year and now it’s getting closer to a marathon pace. A slowdown is welcome; it’s the only way to go the distance.”
Sector-wise, health care led the way, adding 71,000 jobs. Leisure and hospitality along with social assistance and construction also posted significant gains. On the flip side, transportation and warehousing saw a decrease of 34,000 jobs, and the information sector declined by 15,000.
Subsequent adjustments revealed that June and July’s initially reported job gains were overly optimistic, getting scaled down by a combined 110,000. The July estimate was trimmed to 157,000, while June’s figure sank to 105,000, the smallest monthly increase since December 2020.
Despite a growing unemployment rate—reflected by an increase of 514,000 in the rolls of the unemployed—the household count of the employed did rise by 222,000. August often stands as a volatile month in terms of job counts, and this year seems to adhere to that tradition.
Amid this backdrop of labor market shifts, the Federal Reserve faces a tightrope act in setting its future monetary policy. While a rate hike this month is largely ruled out, there’s still a 38% chance of a rate adjustment at the October-end meeting, according to CME Group data.
“The labor market continues to slow and loosen,” said Dan Greenhaus, chief economist and strategist at Solus Alternative Asset Management. “I don’t think much about this report changes the Fed narrative.”
The broader economic picture remains a jigsaw puzzle. While consumer spending is strong and inflation shows signs of easing, the labor market appears to be loosening. Investors also reacted to strong earnings reports, with MongoDB and Dell Technologies seeing stock gains of 7% and 19%, respectively, and Lululemon Athletica adding 1.9% after exceeding Wall Street estimates.
Overall, today’s muted response suggests that the short-term rally may be over. Until stocks show significant weakness, though, it might be a good idea to remain bullish. Because, as many traders saw in July, stocks like to run inexplicably higher at times, even when most investors anticipate the opposite.