U.S. stocks kicked off the fourth quarter with strong back-to-back gains earlier this week, with the S&P 500 jumping more than 5.7% off its 2022 low, helping investors claw back some of its crushing 9.3% loss in September.
However, strategists warn the strong rally to start the quarter doesn’t mean investors are out of the woods yet, particularly with Friday’s employment report for September likely to offer important guidance to the Federal Reserve at its next policy meeting in early November.
Lindsey Bell, chief markets and money strategist at Ally, thinks the data may offer a glimpse of the short-term direction for equities. Friday’s employment report is expected to show the economy added 275,000 jobs for the month, compared with 315,000 new positions added in August, according to a survey polled by Dow Jones.
“The expectation is that the report will be goldilocks in nature — not too hot and not too cold,” Bell wrote in a note on Tuesday, adding that the jobs data will need to be in line with, or short of expectations, in order for the stock market to continue higher.
Brian Mulberry, client portfolio manager at Zacks Investment Management, sees equity prices being volatile if we get a “really strong jobs report,” which may have a negative impact on stock prices. “Too many people making too much money, [means they] keep spending money. That keeps prices high, and that means, ultimately, interest rates will be higher for longer,” said Mulberry via phone on Wednesday.
Investor would want to see a monthly decline, with more jobs lost in the economy each month, but “we’re not seeing that materialize yet,” according to Mulberry. As a result, the economy is getting to the target Fed fund rate quicker than previously thought because “we’re not having a job erosion that we want to see.”
Job openings in the U.S. fell sharply in August to a 13-month low of 10.1 million, the Labor Department said on Tuesday, a sign the red-hot labor market might be cooling off a bit as high inflation and rapidly rising interest rates start to rattle the economy. On Monday, the Institute for Supply Management said its closely watched manufacturing index fell to a 28-month low of 50.9% in September, its lowest level in more than two years.
However, Bell explained that the weak economic data doesn’t necessarily mean the central bank will become less aggressive with its interest rate hiking plans, in a follow up interview with MarketWatch.
“Investors are viewing that as a little bit of a relief, though I don’t know that you can read into it that it’s going to lead to the Fed making a pivot or pausing policy at their next meeting,” Bell said via phone. “I think there’s still a lot to be determined before they make that call.”