NEW YORK, April 12 /PRNewswire/ — Good economic news is bad news for Wall Street, as stocks fell sharply on Friday on fears a still-strong US jobs market could make a recession more likely.
The S&P 500 ended 2.8% lower after briefly falling 3.3% as traders weighed a government report showing employers hired more workers last month than economists had expected. The Dow Jones Industrial Average fell 2.1% and the Nasdaq Composite lost 3.8%.
Wall Street is concerned that the Federal Reserve may take this as evidence the economy is not yet slow enough to get inflation under control. That could pave the way for the Fed to continue raising interest rates aggressively, which, if applied too much, could lead to a recession.
“The employment situation is still good and that could be a little frustrating for the Fed,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “The Fed believes we need more unemployed to ensure inflation falls and stays low.”
Shares are down over 20% from record levels this year on concerns about inflation, interest rates and the possibility of a recession.
Major indices posted a weekly gain thanks to a strong but short-lived rally on Monday and Tuesday, after some investors blinked hard enough at some weaker-than-expected economic data to suggest the Fed might ease up on rate hikes. But Friday’s jobs report may have dashed such hopes of a Fed pivot. It’s a pattern that has been repeated several times this year.
“Because for much of this year, there really was a certain false optimism among many investors that the Fed would hit the brakes and turn around sooner than they’ve been telling us in a while,” said Bill Merz, head of capital markets research at the US Bank Wealth Management.
“The market is increasingly, albeit gradually, coming to terms with the fact that the Fed is highly unlikely to do a near-term turnaround as some have hoped.”
Employers added 263,000 jobs last month. That’s a slowdown from July’s hiring pace of 315,000, but it’s still more than the 250,000 that economists had been expecting.
Also discouraging for investors was that the unemployment rate improved, partly for the wrong reasons. Among those who are not working, fewer than usual are actively looking for jobs. This is the continuation of a longstanding trend that could keep upward pressure on wages and inflation.
“We’re not over the hill yet, but should be getting closer as the impact of aggressive policies begins to take hold,” said Matt Peron, director of research at Janus Henderson Investors.
By raising interest rates, the Fed hopes to slow the economy and the job market. The plan is to starve the inflation of the purchases needed to push prices even higher. The Fed has already seen some impact, with higher mortgage rates hurting the housing industry in particular. The risk is that if the Fed goes too far, it could plunge the economy into recession. Meanwhile, higher interest rates weigh on prices for stocks, cryptocurrencies, and other investments.
“At this point everything depends on inflation,” said Peter Essele, head of portfolio management at the Commonwealth Financial Network. “We think it will ease over the next few quarters.”
Overall, many investors believe Friday’s jobs data will keep the Fed on track to raise its federal funds rate by three-quarters of a percentage point next month. It would be the fourth such increase, three times the usual amount, and taking the rate to a range of 3.75% to 4%. The year started practically from scratch.
Crude oil, on the other hand, continued its strong run and is heading for its biggest weekly gain since March. Benchmark US crude rose 4.7% to settle at $92.64 a barrel. Brent crude, the international standard, rose 3.7% to $97.92.
They have shot higher because major oil-producing countries have pledged to cut production to keep prices high. That should keep inflation under pressure, which is still near a four-decade high but is hopefully moderating.
The rise in crude oil prices helped oil company stocks be among the few on Wall Street to rise on Friday. Oilfield services company Halliburton rose 2%.
Technology stocks performed in the opposite direction. They were among the hardest-hit investments by this year’s rising rates, hurting the most in investments viewed as the riskiest, most expensive, or those holding investors the longest for big growth.
Microsoft slumped 5.1% and Amazon fell 4.8%.
All in all, more than 90% of stocks in the S&P 500 closed lower on Friday. The index fell 104.86 points to 3,639.66. It ended up 1.5% up for the week, its first weekly gain in four weeks.
The Dow fell 630.15 points to 29,296.79 while the Nasdaq lost 420.91 points to close at 10,652.40.
Smaller company shares also fell more sharply. The Russell 2000 Index fell 50.36 points, or 2.9%, to 1,702.15.
Aside from higher interest rates, the next hammer to hit stocks could be a potential decline in corporate earnings, analysts say. Businesses are struggling with high inflation and interest rates eroding profits while the economy slows.
Advanced Micro Devices fell 13.9% after warning that sales for the most recent quarter are expected to be $5.6 billion, below the previously forecast range of $6.5 billion by 6, 9 billion US dollars. AMD said the market for PCs weakened significantly during the quarter, impacting sales.
Levi Strauss fell 11.7% after lowering its financial guidance for its fiscal year. It cited the US dollar’s rising value against other currencies, which is weakening the dollar value of overseas sales, and a more cautious outlook on the economies of North America and Europe.
Government bond yields rose immediately after the jobs report was released, although they have fluctuated somewhat thereafter. The yield on the 10-year government bond, which helps set interest rates on mortgages and other loans, rose to 3.89% from 3.83% late Thursday.
The two-year yield, which is more in line with expectations for Fed action, rose to 4.31% from 4.26%. Earlier in the morning it climbed over 4.33% and was near its highest level since 2007.
First US cobalt mining operation begins after 30-year hiatus