The June Jobs Report Looked Stellar -- So Why Isn't the Market Excited?

We recently learned that 224,000 jobs were created in June, a big positive surprise. However, the stock market has been under pressure since the report came out. In this Industry Focus: Financials clip, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why the market may not be as thrilled as you might expect.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on July 8, 2019.

Jason Moser: Matt, let's kick it because we've got a lot to talk about this week. Last week, we got the jobs report in. The headline there, I think, was ultimately a good one. Nonfarm payrolls rose 224,000 in the month of June, beating the market's expectations of 165,000. Now, we know that really, the story when it comes to the jobs report is all about the adjusted numbers. A few months from now, they'll look back, they'll make some adjustments, and that'll paint a little bit more of a picture of what really is going on. But generally speaking, it feels like it was a pretty good report there. What did you take away from this? Worth noting, too, that the unemployment rate actually ticked up slightly. That's just more of a math problem than anything else. But overall, what was your take on the report?

Matt Frankel: Obviously, it was a big upside surprise. But the point is that there's so much talk of, "A recession's coming, a recession's coming, the economy is going to slow down, etc." But it hasn't really been reflected in the data. A lot of people were expecting it to be reflected in this June jobs number, and it just wasn't. The market's really expecting the Fed to start cutting rates and to start doing it soon, as in this month's meeting. In fact, there is a pretty decent chance of a double rate cut, according to the market. They're expecting either at 25- or 50-basis-point rate cut before this jobs report. With great jobs numbers, it's really tough to justify cutting rates.

It's really interesting to mention, however, that currently, there's a 0% percent chance that the Fed won't cut rates priced into the market. I wouldn't be as surprised if they didn't as the market seems they would be.

But the biggest change is that the expectation for a double rate cut, a 50-basis-point rate cut, has really gone down. It's gone down from 20% to a 7% chance based on the futures markets over the past week in a direct response to this jobs report. So expectations are definitely tapering as far as what the Fed's going to do. But I don't know if they've tapered enough, to be honest with you.

Moser: To your point about the recession, we sit there and we talk about it, it feels like we've been talking about this market that's been overvalued for the better part of...I don't know, seven years, maybe, now, it feels like we've been having that conversation? And we haven't seen any type of a material pullback. Certainly, that recession hasn't occurred yet. I have a feeling that we're going to keep on talking about it, and then one day, it's going to happen, and we're going to be like, "See! I told you so! We were just waiting for it!" I mean, a recession is a matter of when, not if. But it really does seem like, today, at least, the politicians in D.C. are trying to figure out a way to not ever have a recession at all.

I guess I get that, but by the same token, we know how the market's ebbs and flows work. It's a cycle. You do look at some of these companies out here today -- these companies are doing great things, but a lot of these valuations still don't make a lot of sense. They're really baking in a tremendous amount of success with businesses that haven't shown or proven any long-term sustained success. They just haven't been around that long. So, I'm feeling like, I really would love to see the Fed butt out of this for a minute and let things go, let the chips fall where they may. We're at a point where I don't know that unemployment can get much better, right? And even still in today's job market, you still have people who are feeling like they're being somewhat left behind when it comes to wages.

Frankel: Right. I can understand, like you said, why all the politicians in Washington don't seem to want a recession ever. No one gets reelected while a recession is going on.

Moser: No they do not.

Frankel: It's very tough to do. So, that's definitely easy to understand. I can get the case for a rate cut. The Fed's there to maximize employment and control inflation. We have no inflation. So, from that part of the dual mandate, it's really tough to make the case that a rate cut is not a good idea. The Fed wants 2% inflation. They're not getting that. So, a rate cut could theoretically help boost that a little bit.

But we are at pretty much full employment. Like you said, some stock valuations are just astronomical right now. There's some that I won't touch just on valuation alone. Not banks. Banks are actually pretty nicely valued right now.

But the other thing is, I'd love to see the Fed not cut rates, I'd like to see them save some ammunition for when there's actually a recession, like when we actually get some real negative data. Right now, they have, what, nine rate cuts they could possibly make to try to combat any slowing economy. I'd like them to save that for when the economy actually appears to be slowing down.

Moser: Well, right. To that point, assuming we hit a point where the you-know-what does hit the fan, if the Fed starts utilizing all of the tools that has in its toolbox today, what if they run out of ammo when they really need it? What are the options that are left there? I don't know that you have a whole heck of a lot left, other than you just start jumping back into that whole quantitative easing cycle, and it doesn't feel like we've fully gotten out of that to begin with.

Frankel: They've been winding down the balance sheet, they could potentially end that and cut rates at the same time, if they want to do a neutral-ish option. But yeah, there's always quantitative easing, but no one wants it to get to that point. That's essentially like lowering rates past zero. Nobody wants it to come to that. I personally would like them to keep a lot of ammunition. And, as a bank investor, keeping rates a little bit higher for longer would be a good catalyst for bank earnings, too. I'd like to see them hold steady. But it doesn't look like the market's expecting that at all. Right now, there's a 93% chance priced in of one cut, a 100% chance of at least one cut, in the July meeting. The market's not expecting them to hold steady.

Moser: Well, I guess we will find out soon enough.