The U.S. stock market was too hot for the job market at first. It might now cool down too quickly.
People who want to be safe have been buying a small group of megacap stocks this year while they wait for the Federal Reserve to lower interest rates. One idea is that this strong group of companies will still make money even if the economy slows down.
Although, a more worrying story has been spreading in the markets about how quickly things could get worse for jobs.
Kevin Gordon, senior investment strategist at Schwab, said, “The pickup in unemployment is what making it the main topic of conversation right now.” He pointed out that unemployment rose to 4% in May after being below that level for two years. “That’s hard to put back in the bottle once you start to see it creep up.”
Some people worry that the Federal Reserve might lower rates to help an economy that isn’t doing well instead of lowering rates to create a “soft landing.”
A senior economic analyst at Bankrate named Mark Hamrick says that 250,000 jobs were added every month on average in the first half of 2024. He thinks that the June report, which is due on Friday, will show a steady unemployment rate but less hiring.
“If either of these key metrics doesn’t meet expectations, it could make people worry about the possibility of a bigger slowdown in the job market and elsewhere,” Hamrick said in an email on Friday.
So far, the economy has been able to handle the Fed’s long path of higher interest rates without blowing up.
The S&P 500 index SPX had its best first half of an election year in almost 50 years on Friday. This is good news for July, which is usually a great month for stocks.
But at the Federal Reserve, people’s views on how strong the job market is seem to be changing. This is especially true since the number of job openings per person has dropped from two per seeker in 2022 to 1.2 now.
“Three months ago, it was a unified front,” Roosevelt Bowman, a senior investment strategist at Bernstein Private Wealth Management, said of the Fed’s messages. “I do believe that the unemployment rate will be very important to pay attention to.”
Investors are keeping a close eye on the job market, even though many people don’t seem to be worried about the risk of a recession this year, since stocks are close to record highs and credit spreads are close to all-time lows.
Luke Tilley, chief economist at Wilmington Trust, said of stocks, “We are very wary of valuations.” This is true even though his investment committee is adding to stocks, including U.S. large-caps.
Instead of investing in the well-known “Magnificent Seven” stocks, such as Apple Inc. (AAPL, -1.63%) and Amazon.com Inc. (AMZN, -2.32%). Google Inc. (GOOG), -1.84% Nvidia Corp. NVDA, -0.36% and others, Tilley sees value in the other lagging parts of the S&P 500. He says that the rally will “broaden” as economic growth slows and inflation falls even more. This should make it possible for a few rate cuts.
Also, Tilley warned that the economy would slow down after interest rates reached their highest point in 2006. This would take about 18 months. “I don’t think there are many similarities between now and the beginning of the recession in 2007–2008, but it is interesting to note that it took a long time for a recession to start after rates were raised.”
Matt Stucky, who is the chief portfolio manager for stocks at Northwestern Mutual Wealth Management Company, isn’t as positive.
Wall Street thinks that the stock market will have double-digit earnings growth this year and next. However, Stucky is worried about weaker economic data, rising consumer debt, and the Fed’s policy rate staying at its highest level in about 20 years.
FactSet predicted that the S&P 500 would earn 11.3% more each year in 2024 and 14.5% more the following year.
Stucky said, “All of this is what should happen when the Fed is trying to slow the economy on purpose.” Instead, he thinks investors should get their money ready for a mild recession in the next 12 to 18 months. “We believe that risks are growing.”
Even though stocks went down on Friday, they all went up for the month. According to FactSet, the Dow Jones Industrial Average DJIA went up 1.1%, the S&P 500 went up 3.5%, and the Nasdaq Composite COMP went up 6%. The S&P 500 and Nasdaq both went up for a third straight quarter, while the Dow went down at the end of the quarter.
