After a robust first half of the year, the red ink flashing across the major equity indices has investors asking the same question: Why are stocks down today? As usual, the crosshairs focus on the Federal Reserve. However, the culprit is the labor market. While job growth generally represents a positive framework, it doesn’t help the Fed’s efforts to control inflation.
Specifically, payroll processing firm ADP released employment data that showed private sector jobs increased by 497,000 in June. According to CNBC, that’s the biggest monthly gain since July 2022. Further, last month’s increase represented more than double the Dow Jones consensus estimate of 220,000 employment opportunities added. Also, the latest tally smoked the downwardly revised 267,000 jobs added in May.
At face value, individual nations aim for strong labor market growth for economic growth and social stability. Nevertheless, the ADP print also implies that more dollars (from more employed individuals) are chasing after fewer goods. By logical deduction, that’s only going to increase prices, adding to inflationary woes.
Therefore, it’s no wonder that people ask, why are stocks down today? Bluntly, the Fed needs to take off the kiddie gloves and attack inflation.
In fairness, CNBC notes that the ADP data (which comes before Friday’s official employment situation report) often features unreliable data. It also tends to be more volatile than other sources. Still, the reading suggests the Fed’s job is more difficult than earlier advertised.
Why Are Stocks Down Today? Disinflation Faces Credibility Concerns
Fundamentally, the concept of disinflation represents a key component of investors’ concerns. Of course, the textbook definition of disinflation is the declining rate of inflation. Put another way, prices still rise during a disinflationary cycle. It’s just that they rise at a slower pace than before.
Moreover, the “market” definition of disinflation colloquially means a slowing inflation rate without catalyzing a recession. Indeed, the concept of gentle disinflation helped buoy sentiment on Wall Street late last month. With heavily watched gauges of consumer prices showing a decelerating trend, many observers felt that the Fed wouldn’t need to aggressively implement a hawkish monetary policy.
So, why are stocks down today? Primarily, the aforementioned optimistic assessment may need a reality check. Should Friday’s official jobs report also come in hotter than anticipated, the central bank must surely respond.
“The market clearly would have preferred an in-line number,” said John Lynch, Chief Investment Officer at Comerica Wealth Management. “But because [the ADP jobs report] was more than double expectations, that really ratchets up the fear factor that the Fed would have to be more aggressive.”
However, an aggressive Fed also ramps up the risk that its intervention may overcorrect, leading to a recession; hence, the stock market’s somber mood today.
Why It Matters
According to Barron’s, Treasury yields shot up following the ADP report, with the 10-year yield rising to 4.061%. Also, the two-year yield jumped to 5.078%. Investors will want to note that the Federal Open Market Committee (FOMC) will meet for two days starting July 25. At that time, traders are betting that the Fed will raise the benchmark interest rate.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
