What the Blowout Jobs Report Means
Financial markets usually celebrate a blowout jobs report like the one we received in December. But in this case, they seem to be worried about too much of a good thing.
The United States added 256,000 jobs in December, far more than expected. That’s good news for the economy. After all, solid employment trends are the most important driver of consumer spending.
But reaccelerating job growth adds to the list of things the Federal Reserve is pondering as it reviews its interest rate policy. At its September meeting, the Fed penciled in 100 basis points (100 basis points = 1 percentage point) of cuts, thinking the risks of inflation and a cooling jobs market were more balanced than before. In December, the Fed revised its 2025 projections to just 50 basis points of cuts because of concerns that the incoming administration’s trade and immigration policies could potentially reignite inflation. With the latest jobs report, the Fed likely sees less of a headwind to employment, which further reduces the urgency of future cuts.
The combination of a strong economy, less aggressive Fed easing, deficit spending, and potentially inflationary trade and immigration policies has given financial markets some indigestion. As of this writing, the 10-year Treasury yield has risen to about 4.8%, the highest in over a year. (See the exhibit.) As interest rates rise, the price of bonds declines.
Exhibit: Bond Yields Are Rising
Source: Clayton Wealth Partners.
Rising yields can give stocks fits, too. Stocks compete with bonds for investor dollars, so higher bond yields can make bonds look relatively more appealing. Higher interest rates can also impact corporate profits, potentially weighing on stocks. Further, higher rates reduce the present value of companies’ future cash flows, which could weigh on stock valuations.
At today’s yields, bonds look like pretty good values. And it’s normal for stocks to experience periodic declines. (Over time, the S&P 500 has averaged about three declines a year of around 5%.) We’re not inclined to make any tactical adjustments to portfolios at this time. However, if a change in conditions changes our perspective, we’ll adjust accordingly.
Bullish
- The Fed has made good progress in reducing inflation since 2022.
- The Fed is now in an easing cycle.
- Consumer spending seems to be supported by a healthy labor market, household investment income, and the wealth effect.
- The most attractive yields for fixed income and cash in years.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Slowing global economic growth.
- Banks are tightening lending standards for consumers.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Middle East conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.