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“Fed Pivot” Looks Unlikely After Strong Payrolls

How stock Correlation Helps You Make Better Investment Decisions

The U.S. economy added 263,000 new jobs in September according to the monthly payrolls report released before the market opened this morning. It surprised analysts and pushed the unemployment rate to 3.5%, the lowest unemployment rate in 50 years.

In response, the S&P 500 fell over 2%, while the tech-heavy Nasdaq-100 fell -3.2%, nearly erasing their gains on the week. Seems backwards, right?

S&P 500 PERFORMANCE OVER TIME

Graphic Via [TradingView]

A strong jobs showing and decades-low unemployment sounds like a story worth celebrating — but investors actually soured on the markets because of the positivity. Those negative nellies were banking on the Fed’s higher interest rates doing some real damage:

  • On Monday, the ISM Manufacturing PMI data came in lower than analysts expected, showing that industrial activity was growing the slowest since the start of the pandemic by one metric.
  • On Tuesday, the Job Openings and Labor Turnover Survey (JOLTS) showed a million less job openings in the economy in August than in July, a sign that the labor market might have blinked in its stare down against high interest rates.
  • On Thursday, the weekly Initial Jobless Claims report showed that unemployment claims rose in the first week of October, coming in hotter than analysts expected.
  • Headwinds abroad — notably in the United Kingdom and Australia in recent weeks — have also lent investors reason to think America will turn away from its aggressive interest rate hike campaign.

Lower rates would be great for investors, but a black box; it could bring back rising inflation, create even higher housing prices, do nothing at all, or do all kinds of crazy stuff all at once.

However, today’s data contradicts the optimistic negativity among investors. Early in the week, they pushed markets up as high as 5% in hopes that a Fed Pivot was in the cards. However, the U.S. economy just looks really good right now — and because it looks good, it looks unlikely that the Fed will change course on its aggressive hikes.

That’s sending the same bunch which ran into the market, praying on weakness in the U.S. economy, running back for the door. It’s ironic, because many investors will run back to the comfort of cash (where their money will glean safe returns at high interest rates.)

Related: Is TINA Dead? What Rising Rates, High Inflation, and Falling Asset Prices Mean for Your Investing Plan.

It underscores another interesting nuance about the markets though: while America has been led to believe that their 401(K)s and investment accounts are one of the best reflections of the economy, investors have laid bare a reality that the markets are not so absolute. They are reflections of value, drummed up by people, based on bias and data. And even if you’re a great investor, identify solid trends, or invest for the long-term — the market could still “act wrong.”

As it demonstrated this week, there are many factors which make stocks complicated; and there are memorable times where stocks are a weak reflection of the economy. In fact, it’s fair to suggest that they’re a better reflection of the American dream of getting wealthy, even when the cost for others could be great.

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