Why a Great Jobs Report Would Be Bad News for the Stock Market

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People walk through midtown on August 30, 2021 in New York City. New York City, which depends economically on both tourists and office workers, had expected to fully reopen by this September.

Spencer Platt/Getty Images

Investors want to know that the labor market is strong—but if Friday’s payrolls report is too strong, it could be bad news for the stock market.

That might seem counterintuitive. Americans, after all, need to work, but if the economy is growing too quickly, the Federal Reserve might need to take action to slow it down. As a result, the market wants the jobs numbers to meet—or slightly beat—the consensus estimate for 720,000 new jobs in August. That would confirm that the recovery is continuing apace despite the disruptions caused by the Covid-19 Delta variant. 

But a result too impressive could be bad news for stocks. A result of 900,000 or more could bring the unemployment rate, which is expected to fall to 5.2%, below 5%, writes Tom Essaye, founder of Sevens Report Research. A number viewed as “too hot” could prompt concerns that the Fed would reduce monthly bond purchases to $90 billion from a current pace of $120 billion in November, Essaye says, rather than current expectations for the Fed to lower purchases to reduce purchases in December or January. “Stocks would likely drop, potentially sharply,” Essaye writes, with the S&P 500 possibly dropping 1% or more.

Nor would a strong report just impact stocks. A blowout number could cause the 10-year Treasury yield to jump above 1.4%, from 1.3% Thursday, causing problems for fast-growing technology stocks that are more sensitive to changes in long-dates bond yields, and forcing investors out of the highflying growth stocks and back into more cyclical growth shares, perhaps prompting yet another rotation.

Either, investors should hope for a report that’s not too hot, and not too cold—but just right.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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