At the outset of 2024, investors widely embraced the belief that lower interest rates were on the horizon, setting the stage for a mostly optimistic outlook that buoyed major U.S. stock indexes, particularly those dominated by large-cap and technology stocks. This sentiment, which gained traction in the market, contributed significantly to the attainment of new record highs in June.
However, the release of May’s jobs report jolted the markets and challenged this prevailing thesis. The report stunned traders and economists alike with its revelation of unexpectedly robust labor market data. Contrary to expectations, the U.S. economy added a substantial 272,000 new jobs, surpassing economists’ median forecasts by a significant margin of 82,000. Moreover, the report indicated a worrisome increase of 4.1% in average hourly wages over the past 12 months, signaling potential inflationary pressures. This unforeseen data contradicted earlier indicators that suggested a possible economic slowdown.
In the wake of the surprising jobs report, top executives, economists, and traders began openly expressing doubts about the feasibility of rate cuts by the U.S. central bank. This dramatic shift in sentiment marked a stark reversal from the initial expectations of multiple rate reductions earlier in the year. Consequently, Treasury yields experienced a notable uptick for the first time in seven sessions, leading to a strengthening of the ICE U.S. Dollar Index. Amid the uncertainty, stock investors grappled with the implications of the strong job growth, resulting in lower closes for all three major indexes on Friday.
The discrepancy between the performance of large-cap stocks and the broader market was highlighted by Kevin Rendino, chairman and CEO of 180 Degree Capital. Rendino noted that while the S&P 500 showed resilience and approached record highs, the small-cap Russell 2000 index experienced significant declines. This discrepancy underscored the nuanced nature of market dynamics, with over 1,000 stocks registering new lows during the week despite the buoyancy of major capitalization stocks.
Market sentiment regarding rate cuts underwent a notable shift, with interest-rate swaps indicating diminished expectations for rate reductions by the Federal Reserve. Fed-funds futures traders adjusted their projections accordingly, pricing in a reduced likelihood of rate cuts by September. Additionally, a growing number of small-business owners expressed concerns about potential rate hikes and the specter of stagflation, reflecting a shift in sentiment from earlier in the year.
The release of the jobs data triggered a sell-off in U.S. government debt, leading to an increase in Treasury yields across various maturities. Despite the negative reaction in the bond market, the S&P 500 and Nasdaq Composite managed to secure weekly gains, albeit at a slower pace than earlier in the week. The concentrated nature of market gains, driven by a select group of large-cap stocks, contributed to the divergence in market sentiment regarding the need for rate cuts.
Looking ahead, economists and analysts are reassessing their outlook for the economy and monetary policy in light of the unexpected strength of the labor market. While some suggest that the current business cycle still has room for growth, uncertainties remain, particularly regarding inflationary pressures and the trajectory of global interest rates. These factors could influence the Federal Reserve’s future decisions and shape market sentiment in the coming months.