The May jobs report showed the US economy continued to add jobs at a healthy clip. Markets reacted how you might expect: they rose. The report went a long way in alleviating concerns of an imminent recession. In effect, this good news was good news. That hasn’t always been the case over the last few months. Ironically, we’ve seen markets sell-off at times this year following strong employment data. So what’s going on here?
Good news has been “bad news”
An early March jobs report showed the economy added 318,000 jobs in February versus expectations for 225,000 additions. The reaction to this strong number? Stocks sold off, falling more than one percent on the day of the release on March 10th.
This strong data spurred concerns that the Fed will be encouraged to keep raising interest rates. For if their previous interest rate hikes hadn’t yet dented the economy into a recession, and inflation is still too high, the Fed has cover to keep raising rates. This idea of good news on the economy being “bad news” for the market was summarized well in this article by Nerdwallet.
One might argue that the March sell-off that day had more to do with the collapse of Silicon Valley Bank than the stronger than expected jobs report. Okay, well what about in February? The S&P 500 fell 1% on Friday, February 3, after it was revealed that the economy added more than 500,000 jobs in January. This number was well above predictions for an increase of 185,000 jobs.
Jobs data for the previous month is typically released on the first Friday of each month. In the five releases from December 2022-April 2023, stocks fell more than 1% two times; rose 2% once, and traded flat twice. Ironically, the best day for the market was when jobs data was “in line” with expectations and the two worst days occurred when jobs data came in “stronger than expected.”
The media narrative has consistently focused on how this “good news” on jobs is “bad news” for Fed policy, and thus, markets in general.
Now, good news is good news?
Breaking with earlier patterns, markets rallied following the jobs report in early May, even though the economy added way more jobs than expected. This report may have marked a change in the narrative from one of, “Oh no! This means the Fed has to keep raising rates…” to “Oh good! The economy isn’t entering a recession.”
First, because the Fed has now raised interest rates to 5%, there’s less room for them to keep going higher. That’s in contrast with past jobs reports when the Fed was still under 4-4.50%. At those prior interest rate levels, the Fed’s interest rate was still below the inflation rate (as measured by CPI). However, with the latest CPI reading coming in at 4.90%, the Fed’s rate is now above CPI. The Fed has typically stopped raising interest rates once it’s main interest rate was above CPI.
So, at this point, the Fed, and markets, are likely to welcome strong jobs data. Instead of strong jobs data being viewed as “bad news,” we’re now likely to see it viewed as “good news” as it signals a recession is not under way. It’s hard, if not unprecedented, to have a recession while the economy is still adding jobs.
What will the market do if jobs data starts coming in worse than expected? That part is rather tricky. If we saw markets sell-off on strong jobs data, might we see them go up on weak jobs data? While counter-intuitive, it’s possible. In six of the last nine recessions, the stock market rallied even as the unemployment rate rose.That’s one key benefit of the Fed already being at 5% with their interest rate: they’ve given themselves room to cut interest rates if the economy starts slowing down and requires monetary support.
Overall, we welcome the latest developments in the market. After all, good news should be treated like good news.
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