• 209 days Could Crypto Overtake Traditional Investment?
  • 214 days Americans Still Quitting Jobs At Record Pace
  • 216 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 219 days Is The Dollar Too Strong?
  • 219 days Big Tech Disappoints Investors on Earnings Calls
  • 220 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 222 days China Is Quietly Trying To Distance Itself From Russia
  • 222 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 226 days Crypto Investors Won Big In 2021
  • 226 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 227 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 229 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 230 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 233 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 234 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 234 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 236 days Are NFTs About To Take Over Gaming?
  • 237 days Europe’s Economy Is On The Brink As Putin’s War Escalates
  • 240 days What’s Causing Inflation In The United States?
  • 241 days Intel Joins Russian Exodus as Chip Shortage Digs In
  1. Home
  2. Investing
  3. Stocks

The Stock Market Is Defying A Strong Jobs Report

stocks

Labor reports and interest rates do not make for very exciting tea party banter. In fact, the average person regards them as a dry subject and bringing them up is almost guaranteed to wrap up a conversation in record time.

Yet, for long-time equities investors, the two are inexorably linked and therefore unavoidable.

On Friday, June 1, the U.S. Bureau of Labor Statistics released the latest non-farm payrolls report that was solid by almost any yardstick.

Here's a rundown of some of its key highlights:

- Payroll growth clocked in at 223,000, the highest since February and easily exceeding expectations for 188,000.

- The unemployment rate fell to just 3.8 percent, the lowest reading since 2000. Meanwhile, 'real' unemployment (underemployed and discouraged workers) plunged to 7.6 percent, the lowest since 2001.

- Full-time jobs rose 904,000, while part-time positions fell by 625,000.

- Average hourly earnings climbed 2.7 percent and in-line with expectations.

A more aggressive Fed...

Those were pretty solid numbers that all but confirmed a third rate hike that has been chalked in for June.

Rising wages in particular provided a huge counterpunch to arguments against more hikes in the future.

Related: Peak Gold: Is It Already Here?

The Fed has been closely monitoring wage inflation, which has been conspicuous by its absence, in an otherwise healthy economy. Wages have previously remained stagnant even as the labor market approached full employment, something that has, ironically, been blamed on rising rates.

The June hike will be the Fed's second this year and the 7th during this cycle. Many observers expected three hikes for the full year--a couple more solid reports like May's might encourage the Fed to become more aggressive and throw in a fourth and maybe even a fifth for good measure.

...is not necessarily bad for stocks

Stock markets tend to have a knee-jerk negative reaction to rate hikes more often than not.

The last time a stronger-than-expected jobs report came out in February, the S&P went into panic mode and fell 6 percent in just two trading sessions.

In theory, rising interest rates are supposed to make equities look bad as investors prefer to put their money in higher-yielding bonds. Bond yields surpassed the average S&P 500 dividend yield in January and the gap has been widening.

Further, stocks are riskier than bonds because in the event of bankruptcy, bondholders are paid their capital before stockholders. Investors demand a higher risk premium for stocks as interest rates climb making them even more unattractive.

It's therefore quite encouraging that the markets have mostly reacted positively to the May labor report, with both stocks and bonds ticking higher.

Maybe the 'bad' news has already been priced in, especially after the huge February plunge.

(Click to enlarge)

Source: CNBC

But looking at the bigger picture proves that while stocks might react negatively to interest hikes in the short-term, the long-term trend is actually upwards.

Related: London’s $13T Metals Exchange Just Got Even Hotter

CNBC used Kensho, a hedge fund analytics tool, to analyze historical market trends during periods of rising interest rates.

Kensho identified six periods of major interest rate expansions over the last three decades.

The funny thing is that stock markets not only climbed during periods of aggressive interest rate hikes in five of those six expansions, but did so in a big way. Further, they only fell slightly during the single period when they failed to respond positively.

Looks like a case of heads, and stocks investors win big; tails, and they lose a little.

By Alex Kimani for Safehaven.com

More Top Reads From Safehaven.com:

Back to homepage

Leave a comment

Leave a comment