Stocks crashed yesterday after the U.S. government released its May jobs report.

Oddly, the report was very strong. The U.S. economy added more jobs in May than anyone expected. And still, stocks crashed, mostly because we’re in a “good news is bad news” environment on Wall Street.

More on that later.

But for now, let me tell you this. I think Wall Street completely misinterpreted yesterday’s jobs report. And instead of it being a reason to sell stocks, it provided significant ammunition to the bull thesis.

Consequently, yesterday’s selloff in stocks likely won’t last. We see a huge reversal on the horizon. And we believe the rebound that stocks have been staging since early May is the beginning of something much bigger…

Here’s why.

Good News Is Bad News

Yesterday, we got news that the U.S. labor market is on fire, creating many more jobs in May than expected. You’d think that would lead to a big market rally, especially since everyone’s talking about a potential “recession” these days.

But it didn’t.

Instead, stocks crashed after the May jobs report was released.

Why? Because we’re in the “good news is bad news” stage of the market cycle.

That is, stocks’ biggest enemy right now is the Fed. It’s charted a course for multiple rate hikes in 2022. The more the Fed hikes rates, the more likely the U.S. economy is to spill into a recession. And the farther stocks will fall. The converse is true, too.

Therefore, when it comes to stocks right now, it’s all about the Fed and rate hikes. Anything that increases the odds of higher rates is bearish. Anything that decreases the odds is bullish.

A hot economy increases the odds of more higher rates.

Yesterday’s red-hot jobs report underscores that the U.S. economy is still pretty hot. And consequently, it increased the odds of more rate hikes from the Fed.

So, stocks crashed in response.

But we think that yesterday’s strong jobs report was the last hurrah of a labor market on the brink of collapse.

That may sound like awful news. But it’s actually really bullish for stocks.

Who’s Hiring These Days?

Everyone was so blown away by the big beat in the headline jobs report that they missed the bigger-picture trend. Job creation in the U.S. is rapidly slowing, and things are only going to get worse at an accelerated pace.

Prior to May, the U.S. economy created more than 400,000 jobs per month for a record 10 straight months. Throughout the end of 2021 into the first few months of 2022, the economy was adding north of 500,000 jobs per month.

In that context, May’s 390,000 new jobs number is pretty weak. And when coupled with a similar reading from the ADP employment report, it shows a labor market that’s materially slowing.

This slowdown is going to get worse — much worse — and very rapidly.

Jobs Cooldown

Just yesterday, Elon Musk reportedly sent an email to employees saying Tesla (Nasdaq:TSLA) will fire 10% of its workforce. The very same day, Coinbase (Nasdaq:COIN) announced that it would pause its current hiring freeze for the foreseeable future.

These are not isolated examples.

Across the tech industry, companies are either slowing or pausing their hiring, or outright firing people altogether.

Netflix (Nasdaq:NFLX), Robinhood (Nasdaq:HOOD), Carvana (NYSE:CVNA), Klarna and PayPal (Nasdaq:PYPL) all announced planned layoffs over the past few months.

Microsoft (Nasdaq:MSFT), Nvidia (Nasdaq:NVDA), Lyft (Nasdaq:LYFT), Snap (NYSE:SNAP), Uber (NYSE:UBER), Salesforce (NYSE:CRM), Meta (Nasdaq:FB) and Twitter (NYSE:TWTR) have all either slowed or paused hiring over the past few months.

That has massive ramifications for the labor market. Some companies that I just mentioned have been some of the economy’s biggest job creators over the past few years. Turn those job creators into job destroyers, and that’s how you get a collapse in the labor market.

We wouldn’t be surprised to see headline payroll numbers fall below 100,000 by July and possibly turn negative by August or September.

Since such a collapse would cause the Fed to pause rate hikes, that’s incredibly bullish for stocks.

Wage Growth Is Dropping

A completely overlooked positive data point from yesterday’s jobs report was the continued drop in wage growth.

May wage growth missed expectations, and average hourly earnings growth was just 5.2%. That represents the second consecutive month of slowing wage growth — a first since early 2021.

That’s really bullish on the inflation front because wage growth is one of its stickiest drivers.

If wage growth continues to cool, inflation — which is already easing — will keep falling, too. If inflation keeps decelerating, the odds of big rate hikes in the back half of 2022 will drop. And if that happens, the economy will stabilize. And stocks will rebound.

We’re pretty confident in saying that wage growth will keep dropping.

The companies that are pausing hiring today are some of the economy’s top payers, too. The average base salary over at Tesla is north of $100,000. At Facebook, it’s over $125,000. At Netflix, it’s $135,000. And at Nvidia, it’s $144,000.

In other words, the economy’s top-paying employers are either slowing hiring, pausing hiring, or outright firing folks. Naturally, that means wage growth should continue to fall.

And again, that means inflation should decelerate, and stocks should rally.

The Final Word on the Jobs Report

Wall Street completely misinterpreted Friday’s jobs report. It was bullish for stocks — not bearish.

The reality is that the U.S. economy is in a very good “Goldilocks” situation right now. It’s not hot enough to warrant further aggressive Fed action. And it’s not cool enough to say we’re bound for a deep recession.

It’s the perfect temperature.

Here’s what will happen over the next few months.

The economy will slow in June and July as the Fed hikes rates another 50 basis points at each meeting. By August, the labor market will be much weaker than it is today, and inflation will be much lower. The Fed will reassess its monetary policy. And come September, it’ll either pause or pivot to more dovish 25-basis-point hikes. At that point, the U.S. economy will regain lost momentum and expand healthily into 2023.

Stocks will rebound — strongly.

But remember; the stock market is forward-looking. It will bounce before the Fed pivots dovish and the economy regains momentum. Is that bounce already happening? Is that why stocks have rallied over the past month?

That’s very possible. And as such, we think the best move today is to position yourself for a big “U-turn” in the markets.

That’s what we’re doing in our flagship investment research product Innovation Investor. And so far, it’s paying off. Our Top 10 stocks model portfolio has crushed the market by more than 6X over the past month!

So, if you’re feeling like the markets are ready to stage a big comeback, I highly suggest you plug into a portfolio ready to roar in the back half of 2022.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.