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Stocks Rally On Hot Jobs Report—But Here’s Why It’s Not All Roses For Investors

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Stocks Rally On Hot Jobs Report—But Here’s Why It’s Not All Roses For Investors

Topline

Leading U.S. stock indexes gained Friday after the Labor Department delivered a scalding October jobs report, which revealed a far stronger labor market than anticipated, but not all assets basked in the rally.

Key Facts

The Dow Jones Industrial Average rose as much as 0.7%, or 300 points, the S&P 500 climbed as much as 0.8% and the tech-heavy Nasdaq bounced as much as 1.2% and the small-cap Russell 2000 surged 1.6% shortly after market open, though gains were trimmed by late morning trading.

“This morning’s report is good for stocks, and the economy continues to show incredible resilience,” remarked Bolvin Wealth Management Group president Gina Bolvin in emailed comments, adding she’s “more bullish today than I was yesterday.”

That bullish interpretation clearly played out broadly across equities, as the hiring bounceback bolstered the case for continued U.S. economic strength, but the labor market resilience did dampen hopes for what many investors had hoped: Highly aggressive interest rate cuts to kickstart the economy.

The market-implied odds of a second-consecutive 0.5 percentage point cut from the Federal Reserve at its meeting next month fell Friday to 6%, down from 32% a day ago and 53% a week ago, according to derivatives trading activity tracked by CME Group.

Fixed income assets slumped accordingly as bond traders decreased bets the Fed would rapidly slash rates.

The yields for 2-year U.S. Treasury notes spiked 15 basis points to a four-week high of 3.88%, up from last Friday’s 3.56%, and 10-year note yields rose 10 basis points to a two-month high of 3.97%, up from last Friday’s 3.75% (higher bond yields mean less valuable bonds as investors demand higher annual payouts to hold government debt).

Big Number

176,000. That’s how much more the U.S. labor force grew from July to September than expected prior to Friday morning’s release. September’s 254,000 nonfarm payroll additions, the highest total in six months, were 104,000 more than economist forecasts, while the government upwardly revised July and August’s payroll growth by 55,000 and 17,000, respectively.

Key Background

The stronger labor market data is undoubtedly a welcome development for investors hoping to see strong economic growth, but less stark rate cuts erase what is essentially a free space for equity valuations, as lower borrowing costs immediately lift corporate profit margins. Last month, the Fed lowered the federal funds rate from 5.25%-5.5% to 4.75%-5%, but the lower rates are still higher than they ever were from 2008 to 2022. The higher yields for the 10-year government bonds are particularly worrisome for potential borrowers, as they are viewed as a benchmark used to determine rates for loans such as mortgages. The 10-year yield is up more than 30 basis points since the Fed cut rates Sept. 16.

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