Why a Robust Jobs Market Is Terrible for Investors in the US Stock Market

Market emotions are suffering as a result of unexpectedly robust employment growth and subpar tech profitability.

Wall Street is worried that stock prices may fall as a result of the Fed's rate increases despite the record-low jobless rate. Even after numerous subsequent rate rises, the job market in the United States is still strong. The fact that more and more people are finding employment is turning out to be bad news for Wall Street investors. When the labor market is robust and wage growth is putting more money in workers' pockets, inflation is stimulated. The US economy is still having trouble meeting the demand for the goods and services it now provides, which is largely to blame. Perhaps the central bankers do not want the employment sector to flourish.

After a stellar start to the year, the capital markets are now falling, which indicates that momentum is shifting in the wrong direction. Even though the Federal Reserve's (Fed) chairman, Jerome Powell, adopted a dovish stance at the beginning of February, recent earnings reports and the most recent economic data suggest otherwise. As corporate earnings decline, markets are responding aggressively to the possibility of a more hawkish Fed.

"Powell has cautioned that pay pressures are a serious issue for inflation, and this morning's data confirms the wage pressures are still high. According to José Torres, Senior Economist at Interactive Brokers, the markets are being smacked with a classic one-two, jab-cross punch combo as incoming data point to growing inflation and declining incomes.

Stunningly, payroll employment increased by far more than expected, totalling 517,000 employees, far more than the 260,000 from the previous month and the 185,000 predicted. There is a significant labor shortage, as evidenced by the fact that the unemployment rate, which is currently 3.4%, is the lowest it has been since 1969.

"The lack of employees continues to produce a climate of heightened pay pressures, with wages increasing by 0.3% month over month (m/m) or 3.6% annually, which is outside of the Federal Reserve's 2% inflation objective. The ISM services index released a rating of 55.2% for January, exceeding forecasts of 50.4% and returning to growth after only one month of contraction with a 49.2% reading in December, which only adds fuel to the fire, according to Torres.

Investors view consistently positive labor statistics as bad news because it nearly guarantees the Fed will have to apply more pressure to the brakes or delay raising interest rates. Both greater pay growth and stronger labor demand are positive for workers.

Overall, the macroeconomic situation of today is characterized by sticky inflation that is concentrated in the service sectors of the economy and shrinking incomes as consumer spending slows. While the pressures of higher inflation and elevated interest rates continue to weigh on corporate earnings and revenues, job data are likely to keep the Fed on the market's back via valuations. According to Torres, "Dovish Powell may have planted the seeds for a February fiesta, but today's news may have laid the groundwork for a February flush.