NEW YORK — U.S. stock markets are experiencing significant declines amid concerns that a recent positive jobs report might inadvertently keep inflation and interest rates elevated, which is unfavorable for Wall Street.
As midday trading progressed, the S&P 500 fell by 1.5%, positioning it for its fourth decline in five weeks. The Dow Jones Industrial Average saw a drop of 628 points, also translating to a 1.5% decrease. Similarly, the Nasdaq composite tumbled by 1.8%.
The stock market’s downward trend mirrored movements in the bond market, where yields surged following the announcement that U.S. employers added a considerably higher number of jobs than economists had forecasted in the previous month.
While a robust job market is encouraging for job seekers, it also raises concerns about sustained inflation by maintaining a vigorous overall economy. This scenario could deter the Federal Reserve from making the interest rate cuts that investors typically favor. Lower interest rates can stimulate economic growth and enhance investment valuations.
The Fed has already hinted at a reduced likelihood of interest rate cuts this year due to inflation concerns. Some officials are particularly attentive to potential tariffs and policies that might emerge under President-elect Donald Trump’s administration, which could exacerbate inflation.
Despite the positive aspects of the job report, some analysts caution that the strong job creation numbers might not paint the complete picture. Brian Jacobsen, the chief economist at Annex Wealth Management, noted that while the overall employment figures exceeded expectations, sectors like manufacturing are facing significant challenges.
Jacobsen emphasized that even if the broader economy seems robust, individual economic experiences can vary widely. Additionally, the growth in average hourly earnings was reported to be below 4% last month, a statistic that the Fed closely monitors, according to Wells Fargo Investment Institute’s Senior Global Market Strategist Scott Wren.
These mixed signals led to a reduction in Treasury yields after an initial spike following the jobs report. However, a subsequent report indicated growing consumer pessimism regarding inflation expectations, suggesting that consumers foresee a 3.3% inflation rate over the coming year—up from the previous month’s expectation of 2.8%. This marks the highest inflation expectation recorded in the University of Michigan’s survey since May, with notable declines in optimism among lower-income households and political independents.
For traders on Wall Street, the situation has raised alarms as many had anticipated a series of interest rate cuts that propelled stock indexes to record highs over the last year. Should the rates not decrease as expected, it could result in either declining stock prices or a necessity for stronger profit growth among companies to compensate.
Higher yields particularly impact stocks perceived as overvalued, putting pressure on major tech companies that have thrived in the recent AI technology surge. For instance, Apple saw a decline of 3.3%, and Nvidia dropped 2.9%, making them two of the most significant contributors to the S&P 500’s downturn.
Smaller firms are also vulnerable to rising interest rates due to their reliance on borrowing for growth. The Russell 2000 index, which tracks smaller companies, fell by 2.3%, outpacing losses seen in larger indexes.
Insurance companies faced additional challenges, particularly as wildfires continued to rage around Los Angeles, damaging high-value real estate, primarily homes priced over $3 million. This destruction is likely to affect the profitability of insurers, with Allstate declining by 6%, Chubb by 5.2%, and Travelers by 4.2%.
In contrast, Delta Air Lines reports a 10% increase in its stock value after delivering a stronger-than-expected profit for the final quarter of 2024. The airline noted robust travel demand that has gained momentum toward the end of last year and anticipates continued strength into 2025.
As the earnings season approaches, large banks are expected to begin reporting their financial results for the end of 2024 next week.
In the bond market, the yield on the 10-year Treasury spiked to 4.78% post-jobs report from a previous 4.68% before settling back to 4.74%. For context, it was recorded below 3.65% in September, indicating a significant shift in the bond market dynamics.
The yield on the two-year Treasury, which correlates closely with anticipations for the Federal Reserve’s near-term actions, rose to 4.36%, up from 4.27% from the previous day.
Given Friday’s jobs report, market participants now predict that the Fed is unlikely to lower interest rates during its upcoming meeting later this month. This would mark the first instance of stability in rates following three consecutive cuts.
