Stock Market Rally 'Is Over' As Unemployment Starts Rising And Fears Intensify

Topline

Despite new data signaling the Federal Reserve’s efforts to ease rising prices may be working, investors are becoming increasingly uncertain that inflation will fall enough to avoid a recession over the next year—and experts warn the risks are only growing as the dampened sentiment pushes the stock market deeper into a weeks-long trough.

It’s still incredibly unclear whether inflation will fall quickly enough to avoid a recession this … [+] year.

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Key Facts

The S&P 500 plunged to the lowest level since mid-July on Friday after the Bureau of Labor Statistics reported the unemployment rate in August rose for the first time in seven months, climbing to 3.7% from 3.5% in July as the number of new jobs fell and more Americans started looking for work.

After the release, Bank of America analysts told clients the data was “good news” for the Fed because it suggests the economy is cooling down enough that inflation may soon follow suit, but they also predicted that the economy will fall into a “mild recession” later this year as the Fed continues to raise rates, potentially forcing millions of Americans into unemployment.

“The Fed isn’t close to declaring victory,” says Adam Crisafulli of Vital Knowledge Media, adding that “there’s still more work to do and further tightening to come,” and recalling that Fed Chair Jerome Powell last week said households and businesses will face “some pain” in order to cool demand and lower inflation.

In emailed comments, economist David Page of AXA Investment Manager said the Fed will need further proof of economic conditions softening before adjusting its policy materially and warned the outlook could worsen if incoming data shows inflation isn’t coming down.

Even if inflation does cool, Page estimates employment growth will fall toward 100,000 new jobs per month by the end of this year—which would likely help prevent higher-than-expected interest rate hikes, but would also mark the slowest growth since 2020.

Labor Market

The job market has remained one of the economy’s strongest pillars after it bounced back from the Covid recession, but Friday’s employment report could signal a hiring slowdown is under way. According to Bank of America, the number of Americans working or looking for work reached an all-time high last month, exceeding the pre-pandemic peak for the first time.

Stock Market

The tepid jobs report was supposed to be good news for stocks, but the market quickly erased gains on Friday as recession fears intensified. The S&P 500 is down nearly 9% since its peak in August and has plunged 18% this week. “The summer rally is over,” says Bank of America’s Savita Subramanian, predicting the S&P 500 will fall another 8% by year’s end. Meanwhile, the tech-heavy Nasdaq Composite Index has only plunged deeper into bear-market territory. It’s down 27% this year.

Inflation

“The outlook for inflation remains the primary concern for investors,” say Wilmington Trust economists Luke Tilley and Rhea Thomas. Though gasoline prices have fallen from record highs, food and rent prices remain stubbornly high and could complicate the outlook in coming months, they note. The next big inflation print is slated for September 19, when the Bureau of Labor Statistics reports the consumer price index for August.

The Fed

After Friday’s jobs report, bond markets grew increasingly confident that the Fed will hike rates by 50 basis points—and not a worse-than-feared 75 basis points—but the path of monetary policy is still highly uncertain. Powell will be speaking to policymakers at a Cato Institute conference on Thursday and may shed light on how large the next rate hike on September 21 will be.

Stock Market Rally ‘Is Over’ As Unemployment Starts Rising And Fears Intensify