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Stock market rally is ‘over’ as unemployment starts to rise and fears escalate

Topline

Despite new data signaling that the Federal Reserve’s efforts to dampen rising prices could work, investors are increasingly uncertain that inflation will fall enough to stave off a recession over the next year – and experts warn that the risks are only rising as cooled sentiment pushes the stock market deeper into a multi-week low.

Highlights

The S&P 500 plunged to the lowest level since mid-July on Friday after the Bureau of Labor Statistics reported that the unemployment rate in August rose for the first time in seven months, climbing to 3.7% from 3, 5% in July as the number of new jobs fell and more Americans started looking for work.

After the release, Bank of America analysts told clients the data was “good news” for the Fed because it suggests the economy is cooling enough that inflation may soon follow, but they said also predicted that the economy would fall into a “mild recession”. later this year as the Fed continues to hike rates, potentially forcing millions of Americans out of work.

“The Fed is nowhere near declaring victory,” says Adam Crisafulli of Vital Knowledge Media, adding that “there is still work to do and further tightening ahead,” and recalling that Fed Chairman Jerome Powell said last week that households and businesses face “some difficulties” in order to cool demand and bring inflation down.

In emailed comments, AXA Investment Manager economist David Page said the Fed will need further evidence of easing economic conditions before making any significant policy adjustments and warned that the outlook could deteriorate. deteriorate if incoming data show that inflation is not falling.

Even if inflation slows, Page estimates job growth will fall to 100,000 new jobs per month by the end of this year, which would likely help prevent higher than expected interest rate hikes. , but would also mark the slowest growth since 2020.

labor market

The labor market remained one of the strongest pillars of the economy after rebounding from the Covid recession, but Friday’s jobs report could signal that a slowdown in hiring is underway. According to Bank of America, the number of Americans working or looking for work hit a record high last month, surpassing the pre-pandemic peak for the first time.

Sotck exchange

The tepid jobs report was supposed to be good news for stocks, but the market quickly erased gains on Friday as recession fears intensified. The S&P 500 is down nearly 9% from its peak in August and has plunged 18% this week. “The summer rally is over,” says Bank of America’s Savita Subramanian, predicting the S&P 500 will fall another 8% by year-end. Meanwhile, the tech-heavy Nasdaq Composite Index only dipped deeper into bear market territory. It is down 27% this year.

Inflation

“The outlook for inflation remains the top concern for investors,” said Wilmington Trust economists Luke Tilley and Rhea Thomas. Although gasoline prices have fallen from record lows, food and rent prices remain stubbornly high and could complicate the outlook in the months ahead, they note. The next big inflation print is scheduled for September 19, when the Bureau of Labor Statistics releases the consumer price index for August.

The Fed

After Friday’s jobs report, bond markets grew increasingly confident that the Fed will raise rates 50 basis points – not 75 basis points worse than expected – but the trajectory of monetary policy is still very uncertain. Powell will address policymakers at a Cato Institute conference on Thursday and could shed light on the scale of the next rate hike on September 21.

Further reading

Unemployment rate unexpectedly rose to 3.7% in August as layoffs continue to climb (Forbes)

The stock market’s summer rally is over and investors should prepare for a tough September (Forbes)

Hiring slows for second straight month as companies digest ‘conflicting’ economic data, ADP reveals in latest jobs report (Forbes)