NEW YORK — U.S. stock markets took a downturn on Friday amidst concerns that positive job market data might lead to unfavorable conditions for Wall Street, potentially keeping inflation and interest rates elevated.
The S&P 500 dropped 1.5%, marking its fourth weekly decline in five weeks. The Dow Jones Industrial Average fell by 696 points or 1.6%, while the Nasdaq composite also experienced a 1.6% decline.
Investor sentiment was influenced by the bond market, where yields surged after a report indicated that U.S. employers significantly exceeded expectations by adding more jobs to their payrolls in the past month.
While strong hiring numbers are beneficial for job seekers, this progress can put upward pressure on inflation and contribute to economic growth. Such conditions could deter the Federal Reserve from implementing rate cuts that are typically favored by Wall Street investors because lower rates can stimulate economic activity and elevate investment prices.
The Federal Reserve has already signaled that it may implement fewer rate reductions than previously anticipated this year, largely due to fears regarding increasing inflation. This concern is compounded by potential tariffs and policies from President-elect Donald Trump that may exacerbate inflationary pressures.
However, analysts caution that the recent job report might not be as positive as it appears. While the job growth exceeded expectations, sectors such as manufacturing are still struggling. Brian Jacobsen, chief economist at Annex Wealth Management, noted that while the overall economic picture looks promising, individual circumstances may vary greatly.
Additionally, wage growth is a critical factor for the Federal Reserve. Average hourly pay rises were noted to be below 4% last month—exactly the type of growth that the Fed aims to observe, according to Scott Wren, Senior Global Market Strategist at Wells Fargo Investment Institute.
While the initial market reaction led to a spike in Treasury yields, further analysis helped temper those initial increases. Preliminary results from another report released on Friday pointed to a growing pessimism among U.S. consumers regarding future inflation. Participants anticipated inflation to rise to 3.3% over the next year, a notable increase from the previous month’s forecast of 2.8%, marking the highest level since May according to the University of Michigan’s survey. This trend seemed particularly pronounced among lower-income households, as mentioned by Joanne Hsu, director of the Surveys of Consumers.
This predicament is troublesome for Wall Street; last year, traders were optimistic about frequent interest rate cuts, allowing stock indices to reach record levels. Should the Fed deliver fewer cuts than expected, it is likely that stock prices will need to adjust downwards or companies will need to show more robust profit growth to compensate.
Smaller companies are often more vulnerable to rising interest rates compared to larger counterparts due to their reliance on borrowing for growth. The Russell 2000 index, which tracks smaller stocks, faced a decline of 2.2%.
In the realm of specific stocks, Constellation Brands plummeted by 17.1%, the steepest fall in the S&P 500, after reporting lower-than-anticipated profits and revenue linked to weaker consumer spending habits. CEO Bill Newlands remarked that customers are increasingly seeking better value.
Furthermore, insurers felt the impact of wildfires in the Los Angeles region, where properties worth upwards of $3 million were affected, threatening profitability for these companies. Shares of Allstate, Travelers, and Chubb dropped by 5.6%, 4.3%, and 3.4%, respectively.
On a positive note, Delta Air Lines saw its stock rise by 9% following a favorable quarterly profit report indicating robust travel demand through the end of last year, with expectations for continued growth into 2025.
Looking ahead, major banking institutions will begin revealing their earnings for the fourth quarter next week, marking the commencement of a significant reporting period.
In summary, the S&P 500 concluded the day down 91.21 points at 5,827.04, while the Dow Jones Industrial Average fell 696.75 points to close at 41,938.45, and the Nasdaq composite decreased by 317.25 points to settle at 19,161.63.
In the bond market, the yield on the 10-year Treasury jumped to 4.76%, up from 4.68% late Thursday, showing a substantial increase since September when it was under 3.65%. Furthermore, the yield on the two-year Treasury, which more closely aligns with short-term Fed expectations, rose to 4.38% from 4.27%.
As a result of Friday’s employment report, traders now believe it is highly unlikely that the Fed will lower interest rates during their upcoming meeting later this month, which would mark a shift after three consecutive rate reductions. A significant faction on Wall Street even suggests that the Fed may forgo any further rate cuts through 2025.
