Investors are spooked over the possibility of a stock market crash ahead of the release of the January jobs report due Friday, Feb. 2. Indeed, the Federal Reserve’s recent policy meeting pushed the S&P 500 to its worst day of trade this year on Thursday, leaving some traders concerned over the possibility of a further retreat following the release of labor market data.

The report will include info on the number of added jobs as well as changes to the unemployment rate and U.S. wages in the first month of the new year. The data will likely set the tone going further into 2024, as well as mold the narrative surrounding the Fed’s rate-cut schedule.

Indeed, at this week’s Federal Open Market Committee (FOMC) meeting, Fed Chair Jerome Powell disappointed hordes of investors who were hoping for a March rate cut. Powell hinted that rate cuts aren’t likely to come until later in the year.

According to Powell, the past six months of strong inflation readings aren’t enough to justify cutting rates, especially with the labor market still so tight. More data is needed before members of the Fed will feel comfortable to begin lowering rates.

This has put a new gleam of importance on this week’s jobs report.

Stock Market Crash Fears Swirl Ahead of January Jobs Report

Preliminary data suggests that the U.S. labor market may have cooled slightly in January. Indeed, according to private payroll processor ADP, U.S. businesses added just 107,000 workers in the first month of the year. That’s down from 158,000 in December.

While this may seem inherently bearish for stocks, it’s actually a bit more complicated. Part of the reason the Fed feels comfortable holding off on cutting rates is due to the resilience of the U.S. economy. The fact is, unemployment has hovered perpetually low — under 4% — even despite a historically aggressive rate-hike cycle over the past two years or so.

Because of this, should the labor market show signs of softening in Friday’s jobs report, the Fed will likely read it as a sign that rate cuts may be necessary to stabilize economic conditions. That would actually be bullish for stocks.

There are obviously limits to this effect, as a substantial jump in unemployment could fuel recession concerns, which wouldn’t sit well with investors. On the flip side, a notably strong jobs report will likely reinforce the notion that the first rate cut may not come until the second half of the year.

“The labor market remains strong. If we saw an unexpected weakening in—certainly, in the labor market that would certainly weigh on cutting sooner, absolutely, and if we saw inflation being stickier or higher or those sorts of things we would argue for moving later,” Powell said at yesterday’s post-meeting press conference.

What to Look for in Friday’s Jobs Report

Investors are likely hoping for a “Goldilocks” reading this time around. That is, a jobs report that suggests the labor market is still solid, but perhaps not overly so.

If you recall, the U.S. economy added 216,000 non-farm payrolls in December 2023, putting the unemployment rate at 3.7%. This time around, economists forecast 185,000 added non-farm payrolls, reflecting a slightly higher 3.8% unemployment rate.

On the date of publication, Shrey Dua did not hold (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.