Good news for the economy remains bad news for Wall Street, as stocks fell sharply on Friday on concerns that a still-strong U.S. labor market may actually make a recession more likely.
The Standard & Poor’s 500 closed 2.8 percent lower after briefly falling 3.3 percent, as traders weighed a government report showing employers hired more workers last month than economists expected. The Dow Jones industrial average fell 2.1% and the Nasdaq composite lost 3.8%.
Wall Street worries that the Federal Reserve could see that as evidence that the economy has not yet slowed enough to bring inflation under control. That could pave the way for the Fed to continue raising interest rates aggressively, a course of action that risks triggering a recession if done too strongly.
“The employment situation is still good and that might be a little disappointing for the Fed,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “The Fed thinks we need more unemployed people to make sure inflation comes down and stays down.”
Stocks have fallen more than 20% from record highs this year on worries about inflation, interest rates and the possibility of a recession.
Major indexes managed to edge higher for the week, thanks to a strong but short-lived rally on Monday and Tuesday, after some investors looked hard enough at some weaker-than-expected economic data to suggest the Fed may be easing. the increase in interest rates. . However, Friday’s jobs report may have dashed such hopes of a Fed reversal. It’s a pattern that has repeated itself several times this year.
“For much of this year, there was actually a degree of misplaced optimism among many investors that the Fed would hit the brakes and pivot sooner than we’ve been told they would for some time,” said Bill Merz, chief . of capital market research at US Bank Wealth Management.
“The market is increasingly coming to terms, albeit gradually, that the Fed is highly unlikely to pivot in the near term as some had hoped,” Merz said.
Employers added 263,000 jobs last month. That’s a slowdown from the 315,000 hiring pace in July, but still more than the 250,000 economists had expected.
Also discouraging for investors was that the unemployment rate improved in part for the wrong reasons. Among people who are not working, fewer than usual are actively looking for work. This is a continuation of a long-term trend that could maintain upward pressure on wages and inflation.
“We’re not out of the woods yet, but we should be getting closer as the impact of aggressive policy begins to take effect,” said Matt Peron, director of research at Janus Henderson Investors.
By raising interest rates, the Fed hopes to slow the economy and the labor market. The plan is to moderate the inflation of purchases needed to sustain further price rises.
The Fed has already seen some results, with higher mortgage rates hurting the housing industry in particular. The danger is that if the Fed goes too far, it could push the economy into recession. Meanwhile, higher interest rates are depressing prices for stocks, cryptocurrencies and other investments.
“It all depends on inflation at this point,” said Peter Essele, head of portfolio management for Commonwealth Financial Network. “We think it will moderate in the coming quarters.”
Overall, many investors see Friday’s jobs data as keeping the Fed on track to raise interest rates by three-quarters of a percentage point next month. It would be the fourth such increase, which is three times the usual amount and would raise the rate to a range of 3.75% to 4%. He started the year with almost nothing.
Crude oil, meanwhile, posted its biggest weekly gain since March. Benchmark US crude jumped 4.7% to $92.64 a barrel on Friday. Brent crude, the international benchmark, rose 3.7% to $97.92.
Crude prices have soared higher as major oil-producing countries have vowed to cut production to keep prices high. This should keep pressure on inflation, which is still near a four-decade high but hopefully easing.
Rising crude prices lifted shares of oil-related companies, which were among the very few Wall Street gains on Friday. Oilfield services provider Halliburton rose 2%.
Tech stocks led the opposite direction. They were among those hardest hit by rising interest rates this year, which hit investments that are considered the riskiest, most expensive or those that make investors wait longer for big growth.
Microsoft fell 5.1% and Amazon fell 4.8%.
Overall, more than 90% of stocks in the S&P 500 closed lower on Friday. The index fell 104.86 points to 3,639.66. It closed up 1.5% for the week, its first weekly gain in four weeks.
The Dow fell 630.15 points to 29,296.79, while the Nasdaq lost 420.91 points to close at 10,652.40.
Shares of smaller companies also fell more. The Russell 2000 fell 50.36 points, or 2.9%, to 1,702.15.
Beyond higher interest rates, analysts say the next hammer to hit stocks could be a possible drop in corporate earnings. Companies are struggling with high inflation and interest rates eating into their profits while the economy slows.
Advanced Micro Devices fell 13.9% after it warned that revenue for the latest quarter was likely to come in at $5.6 billion, down from its previous forecast of $6.5 billion to $6.9 billion. AMD said the PC market weakened significantly during the quarter, hurting its sales.
Levi Strauss fell 11.7% after cutting its financial guidance for the financial year. He cited the rising value of the U.S. dollar against other currencies, which weakens the dollar value of overseas sales, as well as a more cautious outlook for economies across North America and Europe.
Bond yields rose immediately after the jobs report was released, though they faltered shortly after. The yield on the 10-year note, which helps set interest rates on mortgages and other loans, climbed to 3.88 percent from 3.83 percent late Thursday.
The two-year yield, which more closely tracks expectations for Fed action, rose to 4.30% from 4.26%. Earlier in the morning, it climbed over 4.33% and was near its highest level since 2007.