U.S. stock markets are experiencing a significant decline amid concerns that the positive news from the job market released on Friday could potentially hinder Wall Street. The fear is that strong employment figures might lead to persistent inflation and sustained high interest rates.
The S&P 500 index was down by 1.3% during afternoon trading, heading towards its fourth weekly loss in five weeks. The Dow Jones Industrial Average fell 582 points, or 1.4%, around 1:14 p.m. Eastern time, while the Nasdaq composite saw a decline of 1.4%.
Stocks reacted negatively to the bond market, where yields spiked following a report indicating that U.S. employers added significantly more jobs than anticipated last month. While increased hiring is beneficial for job seekers, it could also contribute to rising inflation by keeping the economy robust. This scenario could discourage the Federal Reserve from implementing interest rate cuts, which are typically favored by Wall Street. Lower interest rates can stimulate the economy and elevate investment prices.
The Federal Reserve has signaled that it might reduce rates less frequently this year than previously forecasted due to inflation concerns. This cautious stance is partly influenced by the potential impact of tariffs and other policies from President-elect Donald Trump that could exacerbate inflation.
Nevertheless, Friday’s employment report may not be as strong as it initially appears. While the hiring numbers exceeded expectations, there are indications that the manufacturing sector is still facing challenges, as noted by Brian Jacobsen, chief economist at Annex Wealth Management. He mentioned that while the macroeconomy may seem stable, the microeconomic conditions for individuals can vary significantly.
Additionally, the wage increases for workers may be a critical factor for the Fed, and the recent gains in average hourly earnings were below 4%. According to Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute, this figure is what the Fed is keen to observe.
These mixed interpretations contributed to a reduction in Treasury yields after their initial surge following the jobs report. However, a preliminary report released later indicated that American consumers are growing more pessimistic about inflation. Consumers now expect an inflation rate of 3.3% for the coming year, an increase from 2.8% in the previous month, marking the highest figure in the University of Michigan’s survey since May. This decline in optimism is notably pronounced among lower-income households and political independents, according to Joanne Hsu, director of the Surveys of Consumers.
The current situation poses a challenge for Wall Street traders who had anticipated a series of interest rate cuts from the Fed, which had previously led U.S. stock indexes to achieve numerous record highs last year. With fewer cuts expected this year, stock prices may need to decline, or corporate profits may need to rise significantly to compensate for the situation.
Stocks perceived as the most overvalued may face the most significant pressure due to increasing yields. Big Tech companies, whose valuations have surged amid an artificial intelligence boom, are particularly affected. For instance, Apple shares dropped by 2.5%, and Nvidia shares fell by 2.6%, both contributing to the S&P 500’s decline.
Smaller companies are also impacted by rising interest rates, particularly since many of these firms require borrowing to fuel growth. The Russell 2000 index, which focuses on smaller stocks, fell by 2.3%, suffering the greatest losses compared to other indexes.
Additionally, insurance companies have faced mounting pressure due to wildfires raging in the Los Angeles area. Many homes lost were located in affluent neighborhoods where property values exceed $3 million, leading to significant potential losses for insurers. Specifically, Allstate’s stock fell by 6.7%, Chubb dropped by 4.1%, and Travelers saw a decline of 4.3%.
On a positive note, Delta Air Lines experienced a notable increase of 9.4% after reporting stronger-than-expected profits for the last quarter of 2024. The airline cited robust travel demand that has continued to grow through the end of last year, with expectations for this trend to extend into 2025.
As earnings season begins in earnest, major banks will start releasing their financial results for the end of 2024 next week.
In the bond market, the yield on the 10-year Treasury surged to 4.78% after the jobs report release, up from 4.68% late the previous day, before settling back to 4.76%. In contrast, the yield on the two-year Treasury, closely aligned with upcoming Fed actions, rose to 4.37% from 4.27%.
Following Friday’s jobs report, traders are now viewing it as nearly certain that the Fed will refrain from cutting interest rates at its upcoming meeting scheduled for the end of this month. This would mark the first time the Fed has maintained its position after implementing three consecutive interest rate cuts.
