By Avi Salzman
The bond market is in charge right now — and that’s bad news for stocks.
The major stock indexes fell sharply on Friday after the monthly jobs report came in hotter than expected and sent bond yields soaring. Investors fear that the Federal Reserve will keep interest rates high — or even raise them — to stave off inflation. The yield on the 30-year Treasury note briefly rose above 5%, its highest level since November 2023.
The Dow Jones Industrial Average fell 697 points, or 1.6%, on Friday to finish the week off 1.9%. The S&P 500 index also closed down 1.9% for the week, while the Nasdaq Composite fell 2.3%. The move wiped out all of the market’s 2025 gains, and then some.
Predictions are turning ominous. “Today’s unemployment report likely sounds the death knell for this easing cycle from the Fed,” wrote Peter Graf, chief investment officer at Nikko Asset Management Americas. BNP Paribas economists warned that the jobs report could be a “highway to the danger zone.”
But imagine for a moment that good economic news is just that: good news. If more Americans have jobs, they’ll be able to spend more money. About 70% of the U.S. economy is dependent on consumer spending, after all. And while inflation has remained stubbornly above the Fed’s long-term goals, there are few signs that it’s about to start raging again. The jobs report may have shown a surge in hiring, with 256,000 new jobs added in December, but wage growth has slowed, coming in at 3.9% year over year. That tends to be a good sign for inflation.
For some stock strategists, the setup still looks positive. “If the jobs report is evidence of a strong economy, then Friday’s stock moves look like an overreaction,” said Keith Lerner, chief market strategist at Truist Advisory Services. “In general, the market tends to rise when the economy is expanding, because corporate profits should be strong.”
Fourth-quarter profits, which have just started coming out, should come in at their strongest level in three years, according to FactSet.
Just don’t expect the path to be easy. Stocks have been in a downtrend since early December, when the yield on the 10-year Treasury began to rise, and trading should remain choppy, Lerner said. But it should shake the negative mood eventually, even if it takes a while. “We still think the primary trend is higher, even if it’s going to be a bumpier path,” he said.
Not all stocks will rise equally. While investors had gravitated to small-cap stocks after the election, Lerner thinks they should stick to large-caps for now. Small-caps tend to have more floating-rate debt that could be negatively impacted by the increase in rates. He prefers tech and communications stocks, and financials.
Just don’t let a bad mood get in the way of some good news.
Write to Avi Salzman at avi.salzman@barrons.com