“Interest rates are to asset prices what gravity is to matter.” Warren Buffett
May’s jobs report came in much stronger than expected. U.S. payrolls increased by 172,000, easily topping consensus expectations of roughly 85,000, and the prior two months were revised higher by a combined 93,000. With all the hand-wringing over layoffs, recession fears, and AI supposedly coming for every white-collar desk job in America, this should have been welcome news for markets and policymakers alike. Right? Not exactly.
On the day of the report, the Nasdaq fell 1,122 points, or 4.18%, while the S&P 500 dropped over 200 points, or 2.64%. That seems backward at first glance. Why would markets sell off so sharply in response to positive economic news? Because in markets, context is everything.
Before the labor report, investors had been hoping for weaker economic data. Not because they wanted a soft economy, but because softer data would have strengthened the case for lower interest rates. The Federal Reserve has a dual mandate: price stability and maximum employment. The problem, of course, is that those goals often pull in opposite directions. Policy tight enough to restrain inflation can also slow growth and weaken hiring. Policy loose enough to encourage employment risks reigniting inflation.
If the jobs report had missed expectations, markets likely would have interpreted that as increasing the odds of a Fed rate cut later this year. Instead, the opposite happened. Stronger-than-expected job growth suggested the economy has more momentum than many had assumed, which makes it harder for the Fed to justify easing while inflation remains stubbornly above target. Reuters reported that the stronger labor data pushed investors to rethink the path of monetary policy and helped fuel the selloff. That is the backdrop that matters.
As of the latest readings, the inflation picture is still running too hot for the Fed’s comfort. Core CPI is at 2.9% year over year, headline PPI is at 6.2%, and core PCE is at 3.3%. None of those are remotely consistent with the Fed’s stated 2% inflation target. So while employment remains reasonably firm, inflation has not cooperated enough to make easier money an obvious choice.
After the jobs report, expectations for rate cuts faded further, while the odds of an eventual rate hike moved higher. As of June 10, market pricing still implied a meaningful chance of a hike by year-end, even if that probability eased slightly after the latest CPI report.
That leaves Fed Chair Kevin Warsh in a difficult spot. Warsh has long been seen as more hawkish than many of his predecessors and has been openly skeptical of the Fed’s habit of treating every economic wobble with the same prescription: lower rates, easier money, and more liquidity. Now he inherits an economy with decent job growth, sticky inflation, and rising energy-related price pressures. In other words, the new Fed chair has his work cut out for him.
Markets are forward-looking. Stocks, bonds, currencies, and futures are constantly repricing based on expectations for earnings, rates, inflation, taxes, regulation, and growth. Business students learn early that the value of any investment is the present value of discounted future cash flows. Strip away all the noise, and two variables do most of the heavy lifting: earnings and interest rates.
Corporate earnings have been better than expected. But even strong earnings can be overwhelmed by higher interest rates. When rates rise, or when markets expect them to remain higher for longer, the present value of future cash flows falls. That matters especially for long-duration assets like growth stocks and technology companies, where a larger share of expected value lies further out in the future.
That is why “good news” on jobs became “bad news” for the market. Investors were not reacting to payrolls in isolation. They were reacting to what the better-than-expected jobs report implied for the path of interest rates. Strong labor data reduced the odds of easier money. Higher expected rates compressed valuations and the market repriced accordingly.
The lesson is straightforward: in a market conditioned to cheer for lower rates, economic strength can become a headwind. When valuations are rich and investors are counting on monetary relief, good news is only good if it does not threaten the interest-rate story.
In a market addicted to rate relief, strength is a problem. When investors are paying up for future earnings and praying for cheaper money, good economic news can be the very thing that knocks prices down.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
“Interest rates are to asset prices what gravity is to matter.” Warren Buffett
May’s jobs report came in much stronger than expected. U.S. payrolls increased by 172,000, easily topping consensus expectations of roughly 85,000, and the prior two months were revised higher by a combined 93,000. With all the hand-wringing over layoffs, recession fears, and AI supposedly coming for every white-collar desk job in America, this should have been welcome news for markets and policymakers alike. Right? Not exactly.
On the day of the report, the Nasdaq fell 1,122 points, or 4.18%, while the S&P 500 dropped over 200 points, or 2.64%. That seems backward at first glance. Why would markets sell off so sharply in response to positive economic news? Because in markets, context is everything.
Before the labor report, investors had been hoping for weaker economic data. Not because they wanted a soft economy, but because softer data would have strengthened the case for lower interest rates. The Federal Reserve has a dual mandate: price stability and maximum employment. The problem, of course, is that those goals often pull in opposite directions. Policy tight enough to restrain inflation can also slow growth and weaken hiring. Policy loose enough to encourage employment risks reigniting inflation.
If the jobs report had missed expectations, markets likely would have interpreted that as increasing the odds of a Fed rate cut later this year. Instead, the opposite happened. Stronger-than-expected job growth suggested the economy has more momentum than many had assumed, which makes it harder for the Fed to justify easing while inflation remains stubbornly above target. Reuters reported that the stronger labor data pushed investors to rethink the path of monetary policy and helped fuel the selloff. That is the backdrop that matters.
As of the latest readings, the inflation picture is still running too hot for the Fed’s comfort. Core CPI is at 2.9% year over year, headline PPI is at 6.2%, and core PCE is at 3.3%. None of those are remotely consistent with the Fed’s stated 2% inflation target. So while employment remains reasonably firm, inflation has not cooperated enough to make easier money an obvious choice.
After the jobs report, expectations for rate cuts faded further, while the odds of an eventual rate hike moved higher. As of June 10, market pricing still implied a meaningful chance of a hike by year-end, even if that probability eased slightly after the latest CPI report.
That leaves Fed Chair Kevin Warsh in a difficult spot. Warsh has long been seen as more hawkish than many of his predecessors and has been openly skeptical of the Fed’s habit of treating every economic wobble with the same prescription: lower rates, easier money, and more liquidity. Now he inherits an economy with decent job growth, sticky inflation, and rising energy-related price pressures. In other words, the new Fed chair has his work cut out for him.
Markets are forward-looking. Stocks, bonds, currencies, and futures are constantly repricing based on expectations for earnings, rates, inflation, taxes, regulation, and growth. Business students learn early that the value of any investment is the present value of discounted future cash flows. Strip away all the noise, and two variables do most of the heavy lifting: earnings and interest rates.
Corporate earnings have been better than expected. But even strong earnings can be overwhelmed by higher interest rates. When rates rise, or when markets expect them to remain higher for longer, the present value of future cash flows falls. That matters especially for long-duration assets like growth stocks and technology companies, where a larger share of expected value lies further out in the future.
That is why “good news” on jobs became “bad news” for the market. Investors were not reacting to payrolls in isolation. They were reacting to what the better-than-expected jobs report implied for the path of interest rates. Strong labor data reduced the odds of easier money. Higher expected rates compressed valuations and the market repriced accordingly.
The lesson is straightforward: in a market conditioned to cheer for lower rates, economic strength can become a headwind. When valuations are rich and investors are counting on monetary relief, good news is only good if it does not threaten the interest-rate story.
In a market addicted to rate relief, strength is a problem. When investors are paying up for future earnings and praying for cheaper money, good economic news can be the very thing that knocks prices down.
Mark Lazar, MBA
CERTIFIED FINANCIAL PLANNER™
Share:
Recent Articles
When Good News is Bad
Home Equity Investment Agreements: Fortune or Folly?
Economic Check-Up
The Affordability “Crisis”