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On Friday, March 10, the U.S. Bureau of Labor Statistics released its much-anticipated February jobs report.
Last month, the U.S. economy added 311,000 jobs, roughly 38% fewer than in January (504,000) but significantly higher than the 225,000 analysts were expecting. Average hourly earnings increased by 0.2% and annual earnings were up 4.6% year over year.
Unemployment was slightly higher than in January — 3.6% vs. 3.4% — while the average hours worked per month was lower at 34.5 vs. 34.6 reported last month.
All in all, it looks like good news. But economics is weird. After a second month of solid labor market growth, stock investors have become unabashedly panicked.
The Dow Jones slipped about 0.5% during the opening hour Friday, further erasing all gains earned in 2023. The S&P 500 was down 0.6%. Both indexes have been pinging back and forth ever since, as the market tries to grapple with the strong jobs report and the recent debacle of Silicon Valley Bank.
You’d think adding jobs and increasing wages would soothe investors and economists. A strong labor force, after all, is the backbone of a thriving economy and the hands that hold it back from falling into a recession.
But the more robust the economy becomes, the more erratic stock trading appears. Counterintuitive though it may seem, there’s logic behind the sell-offs. And it centers around the Federal Reserve.
Why a strong economy is currently bad for stocks
The Fed’s relentless interest rate hikes are the primary reason investors fear good economic news.
In a strong economy, the Fed’s power over inflation gradually weakens. That makes traditionally positive factors — like increased wages and spending — a strong current against the Fed’s goal of bringing inflation down to roughly 2%.
We see that in the market's reaction to the recent employment report. In the Fed’s eyes, the problem with the labor market isn’t that companies are creating more jobs. It’s that the number of available jobs outnumbers workers — about 1.9 for every unemployed person. More unfilled positions encourage employers to offer higher wages to attract new talent. Likewise, employers might raise wages for current employees to prevent them from jumping ship.
Higher wages are good — unless they encourage consumers to buy more stuff. That puts pressure on supply, and businesses raise prices to match demand (and make up for those higher salaries). As a result, inflation rates stay stubbornly high.
The Fed knows this, which is why it's making it more expensive for companies to operate — i.e., raising interest rates. Higher rates put pressure on profitability and discourage companies from increasing wages.
That might work for inflation. But it doesn’t work for the stock market.
Good economic news can make investors bearish
Investors find stocks attractive when the underlying company is making more money every quarter. Higher borrowing rates, however, work against that. When companies become less profitable, investors become bearish. It doesn’t matter whether the Fed’s monetary policy is aimed at inflation: Investors sell off because they’re afraid they’ll lose money if they wait.
So, as backward as it sounds, a growing economy will make investors skittish. They’re not just afraid the Fed will raise the federal funds rate (they’ve known that for at least a year); they’re afraid the Fed will push the rate beyond what we expect.
Going into 2023, most experts expected the Fed to raise the federal funds rate to between 5.0% and 5.5%. But Fed Chair Jerome Powell has made it clear he’s willing to raise the rate as high as it needs to go.
At this point, the only good news to the Fed is bad news for most consumers: a mild recession, decreased retail spending and slower wage and job growth. That means any good economic news is bad news for the Fed — and likewise terrible news for stock investors.