by Joe Herrle, CFA, CAIA
Vice President, Alternative Asset Research
Last Friday, the market closed out the day, week, month and quarter all with negative returns. Fears of higher inflation, more tightening by the Federal Reserve and potentially lower corporate earnings weighed on investors’ minds. The S&P 500 broke below the June low last week, extending the bear market that began in January. At 269 days as of quarter end, this is the most protracted correction since the March 2009 low. Surprisingly, the market decided to pull a 180 early this week, returning almost 6% on Monday and Tuesday. So, what was the deal?
After the equity market fell more than 9% last month, extending the year-to-date decline to nearly 25% as of September 30, market sentiment may have been overly pessimistic. With conditions as oversold as they were, significant periodic rebounds can be expected. In fact, the most considerable single-day returns for the stock market often occur amid bear markets; of the 100 largest daily percentage gains of the S&P 500 since 1928, 58 happened during bear markets.
As such, the increased upside volatility experienced earlier this week is not out of the ordinary, and the rally was not random. The catalyst for the upswing were the figures released by the Bureau of Labor Statistics in the Job Openings and Labor Turnover Survey (JOLTS) report. The report revealed a plunge of over 1 million job openings in August, much higher than economists had forecasted. The decline is significant, with it being the largest since the height of the COVID-19 lockdowns in April 2020. Yet quitting and layoff rates remained mostly unchanged. This would typically sound like bad news, but this is what you would call a Goldilocks report: not too hot, not too cold, but just right. Job openings have been a target of the Federal Reserve to rein in rising prices, but they also wish to keep the number of employed unharmed. So, with an indication that Fed policy is working, the markets rallied on prospects of reduced tightening into the future.
Moving to the present, the U.S. Bureau of Labor Statistics released the nonfarm payroll report this morning. Keeping with the theme of volatility (and that good news is bad news), the markets responded negatively. The report shows that the U.S. labor market is robust, with nonfarm payrolls rising by 263,000 in September, while the unemployment rate declined to 3.5% as the labor force participation rate fell back to 62.3%. The last time unemployment was this low was in May 1969. Despite the JOLTS report showing fewer job openings earlier this week, almost every American who wants a job can still get one.
Source: U.S. Bureau of Labor Statistics
Such a strong labor market is good news for workers, but it will be interpreted by the Federal Reserve as a sign that their crusade against rising prices is far from over. Consequently, the path forward for the Fed likely includes more interest rate hikes and quantitative tightening, both adding to market volatility. While the route to higher rates might signal potential pain, the U.S. economy still looks to be on solid footing and, for now, capable of taking tighter financial conditions. Next week will be revealing as many S&P 500 companies’ report earnings on Friday.
Takeaways for the Week
The U.S. consumer remains on sound footing as the job market remains robust
Volatility should remain elevated as the Federal Reserve is likely to continue tightening financial conditions based on recent data
A large portion of S&P 500 companies will begin reporting earnings next Friday, giving us a glimpse into the financial health of the economy