Bad economic news became good news for stocks
Wall Street got a surprisingly weak jobs report Friday and responded by buying stocks.
The U.S. economy added just 29,000 jobs in September, while the unemployment rate edged higher to 4.2%. The report was weaker beneath the headline as well, with July and August payroll growth revised down by a combined 60,000 jobs.
That was exactly the kind of slowdown rate-sensitive parts of the market had been waiting for.
The Nasdaq surged roughly 1.6%, the S&P 500 gained about 0.9% and the Dow climbed around 400 points as investors moved back toward technology and other growth stocks. At the same time, the 10-year Treasury yield dropped back toward 5.2% after reaching levels not seen since 2002 earlier in the week.
The reaction makes sense when viewed against what had been worrying markets just 24 hours earlier.
Investors were staring at multidecade highs in long-term borrowing costs, oil near $100 a barrel and growing concern that sticky inflation would force the Federal Reserve to keep raising rates.
Friday’s jobs report weakened one part of that argument.
The labor market finally looks soft enough to give the Fed a reason to wait.
Technology got the biggest relief
The strongest reaction came from the part of the market most exposed to interest rates.
Technology stocks have spent much of the past month fighting two opposing forces. AI earnings and spending remain strong, but Treasury yields have been moving high enough to put pressure on valuations.
A weaker labor market helps because it reduces the urgency for tighter monetary policy.
September’s report showed more than slower hiring. Average hourly earnings increased just 0.1% from August, while payroll growth over the previous 12 months has averaged only 45,000 per month. The unemployment rate has also remained between 4.1% and 4.3% since March.
None of those numbers point to an economy falling apart. They do suggest the labor market is no longer running hot.
That distinction matters enormously.
The ideal outcome for stocks is not a collapsing economy. It is an economy that cools enough to reduce inflation pressure without taking corporate earnings down with it.
Friday’s market reaction was essentially a bet that the U.S. may still be inside that window.
Oil gave the rally another boost
The jobs report was not working alone.
Oil also moved lower Friday, with Brent slipping below $100 per barrel, easing another source of inflation pressure that has been hanging over bonds and stocks.
That combination is particularly favorable for markets.
Slower hiring gives the Fed less reason to raise rates because of an overheating economy. Lower oil reduces the risk that another energy shock keeps inflation elevated.
Together, they pushed Treasury yields lower and gave investors room to add risk again.
The move also explains why tech led the rally. The Nasdaq is especially sensitive to changes in long-term rates because many of its largest companies trade at valuations based partly on earnings expected years into the future.
When yields fall, those future earnings become more valuable today.
There is a point where weaker jobs stop being bullish
Friday’s rally is another example of the strange environment markets are trading through.
For now, weaker employment is being treated as positive because investors are far more worried about inflation and rates than they are about recession.
That can change.
Hiring of 29,000 is extremely soft, and previous months are being revised lower. If payroll growth continues deteriorating, the conversation will eventually move away from whether the Fed hikes again and toward whether corporate revenue and earnings can hold up.
The market wants cooling. It does not want contraction.
That is the line investors will be watching over the next several reports.
For the moment, though, a softer labor market, falling Treasury yields and easing oil prices removed three pressures at once.
After a week dominated by 24-year highs in bond yields, Friday finally gave Wall Street the kind of economic weakness it could celebrate.
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