NEW YORK – U.S. stocks experienced a significant decline, fueled by concerns that improved job market statistics could negatively impact Wall Street by sustaining elevated levels of inflation and interest rates. The S&P 500 index dropped by 1.5% on Friday, while the Dow Jones Industrial Average lost 1.6%, and the Nasdaq composite fell by 1.6%. This downturn in the stock market was influenced by a rise in bond yields, which increased after data revealed that American employers added far more jobs than anticipated last month. This robust employment growth could further pressure inflation and hinder the Federal Reserve’s plans to lower interest rates, a move that investors are eagerly anticipating.
Market anxiety intensified as traders responded to the positive employment news. Throughout late trading, the S&P 500 was down 1.3%, putting it on track for its fourth weekly loss in five weeks. The Dow Jones Industrial Average dropped by 596 points, or 1.4%, with less than an hour left in the trading session, while the Nasdaq composite experienced a 1.3% decline. The surge in yields in the bond market was seen as a reflection of these concerns after the jobs report indicated a stronger-than-expected hiring trend among U.S. companies.
While the increase in employment is beneficial for job seekers, it could also contribute to ongoing inflationary pressures, which would keep the economy on a stable growth path. This situation might discourage the Federal Reserve from implementing the interest rate cuts that have historically supported stock market growth. Reduced interest rates tend to boost economic activity and elevate asset prices, which has made them a focal point for investors.
The Federal Reserve has signaled that the frequency of impending rate cuts may be less than previously anticipated, primarily due to inflation worries. Some officials express concern over potential tariffs and policies from the Trump administration that could exacerbate inflation further.
It’s worth noting that the recent jobs report may not be entirely as encouraging as it initially appears. While the overall hiring figure exceeded expectations, Brian Jacobsen, the chief economist at Annex Wealth Management, pointed out significant struggles within the manufacturing sector. He emphasized that although the macroeconomic indicators seem stable, individual experiences can vary dramatically.
Furthermore, wage growth is a crucial factor for the Federal Reserve’s decision-making process. Average hourly earnings only saw gains below 4% last month, which does not align with what the Fed desires to bolster its confidence in the economy.
As a result of these complex evaluations, Treasury yields receded from their initial spikes after the job report was released. However, another report underscored the looming inflation issue, revealing that U.S. consumers are now more pessimistic about inflation trends. Consumers’ inflation expectations for the upcoming year rose to 3.3%, up from 2.8% the previous month, marking the highest expected rate since May, according to data from the University of Michigan.
The implications for Wall Street are significant since investors had previously driven U.S. stock indexes to record highs, betting on an easing cycle of monetary policy from the Fed. If these cuts turn out to be fewer than forecasted, stock prices may need to adjust downward or companies may have to demonstrate stronger profit growth to justify their current valuations.
Particularly vulnerable to such changes are stocks regarded as having high valuations, such as those in the tech sector, specifically related to artificial intelligence advancements. Apple and Nvidia were among the biggest drags on the S&P 500, each suffering declines of at least 2.7%. Smaller companies are also adversely affected by rising interest rates, which often necessitate borrowing for growth. The Russell 2000 index, which represents smaller stocks, fell by 2.1%, experiencing a more significant drop compared to other indexes.
The insurance sector faced pressure as wildfires raged in the Los Angeles area, destroying numerous high-value homes, with average prices exceeding $3 million. This significant damage poses a risk to insurers’ profits, leading to drops in stocks for companies like Allstate, which fell by 5.3%, Travelers down by 3.7%, and Chubb losing 3.4%.
In contrast, Constellation Brands’ shares plummeted by 17.4% after the company, known for its Modelo beer and Robert Mondavi wine, reported profit and revenue figures for the last quarter that fell short of analysts’ predictions. The CEO, Bill Newlands, noted declining customer spending as consumers search for better deals. On a positive note, Delta Air Lines saw a sharp rise of 8.4% following a robust profit report that surpassed analysts’ expectations for the last three months of 2024, with strong travel demand continuing into 2025.
As the earnings season kicks off next week, major banks are preparing to unveil their own results for the end of 2024. On the bond market front, the yield on the 10-year Treasury surged to 4.77%, rising from 4.68% late on Thursday, with a notable shift since it was below 3.65% in September. The yield on the two-year Treasury, which closely follows the Fed’s monetary policy projections, increased to 4.39% from 4.27%.
Expectations surrounding the jobs report imply that traders are increasingly confident that the Fed will refrain from cutting interest rates in its upcoming meeting later this month, which would mark the first instance of maintaining rates after three consecutive cuts.
