Strong Jobs Report Triggers Bullish Stock Market Rally

U.S. stocks experienced a significant rally on Friday, October 6th, 2023, after the release of a robust jobs report, marking a substantial turnaround from an initial drop of more than one percent.

In September, the U.S. economy generated 336,000 jobs, as reported by the Labor Department on Friday. This figure far exceeded expectations, which had been set at 170,000.

However, there was an unexpected deceleration in average hourly earnings, with a mere 0.2% increase for the month and a 4.2% annualized gain in September. This slowdown helped alleviate concerns of an overheated labor market leading to higher wages and inflation.

The unemployment rate remained unchanged at 3.8%, compared to the anticipated 3.7%.

Bond yields initially surged to levels not seen since 2007 but retraced as the market rebounded. The yield on the U.S. 10-year Treasury hit a high of 4.892% before closing at 4.779%, while the 2-year yield rose by 6.3 basis points to 5.088% after reaching a peak of 5.151%.

The primary focus for investors was the lower-than-expected hourly earnings, both on a monthly and annual basis, being 0.1% below expectations.

As a result, Fed fund futures now indicate a 33% likelihood of a Federal Reserve rate hike in November, up from the previous 25%.

Investors are increasingly convinced that this potential hike will be the last in the current cycle and that the next move will likely be a cut.

After a week marked by volatility, the Dow closed down 0.3%, the S&P gained 0.48%, and the Nasdaq surged 1.6%.

Here are the closing levels on Friday, October 6th, 2023:

Last Change %Change
DOW JONES   33407.58 +288.01 +0.87%
S&P 500 4308.50 +50.31 +1.18%
NASDAQ   13431.34 +211.51 +1.60%
U.S. 10Y   4.801%
VIX 17.45 -1.04 -5.62%

The reaction to the outstanding jobs report has left many scratching their heads. Some may interpret the report as providing the Federal Reserve with the room to hike interest rates without fearing negative repercussions for employment. Surprisingly, instead of a substantial sell-off, the market experienced the opposite.

This suggests that buyers are no longer concerned about higher rates or prolonged periods of elevated rates. They appear immune to such worries and perceive strong job growth as a positive factor for stocks, a perspective that might be accurate.

The ultimate validation of this belief will be seen in the forthcoming earnings reports. If companies either meet or exceed expectations, we can anticipate this rally to persist.

Even if they slightly miss their targets, the market’s mindset is currently inclined to emphasize positive aspects and overlook the negatives.

Once again, technology companies led the market, so special attention should be paid to tech-related results. With the Nasdaq regaining its 100-day moving average, there are promising signs that this upward trend may continue, but investors should also be prepared for potential volatility.

Source: CBOE, Bloomberg

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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