The Dow Jones Industrial Average (^DJI 0.45%) is back to record highs now, up 140 points to 35,204 on Aug. 6 at 2:39 p.m. EDT, following the latest jobs report from the Labor Department that exceeded all expectations. The report showed U.S. non-farm employers added 943,000 new jobs in July, and the unemployment rate fell 0.5% to the lowest levels in well over a year. 

As a result, bank stocks are on the rise today, with Goldman Sachs (GS 0.42%) and JPMorgan Chase (JPM -2.15%) leading the Dow Jones, up nearly 3% or more as of this writing. American Express (AXP -0.14%) shares are also up today, as investors view the jobs report as potentially leading to a change in policy at the Fed that would be good for banks, coming sooner rather than later. 

Man using smartphone for online banking.

Image source: Getty Images.

A closer look at the jobs report (and why it's a big deal)

The two headline numbers from the jobs report -- 940,000 new jobs and 5.4% unemployment -- are important and impressive. The former is important because it underpins the expectation that the U.S. economy is indeed growing, and the latter because it puts the unemployment rate at the lowest levels we have seen in the COVID-19 era: 

US Nonfarm Payrolls MoM Chart

US Nonfarm Payrolls MoM data by YCharts

Several other data points were also very positive, and showed the continued strengthening of the economy and the jobs recovery. 

  • Temporary layoffs fell by 572,000. 
  • Long-term layoffs fell by 560,000. 
  • Wages continue to rise.

Why bank stocks went up on the jobs report

In short, because investors think this could lead to the Fed acting more quickly on changing monetary policy, in particular its plans to raise interest rates, which would be a boon for bank stocks. Over the past year, the Fed has been pretty steadfast in its intentions to keep interest rates at near zero for the foreseeable future, particularly so long as the unemployment remains at elevated levels. 

Overnight Federal Funds Rate Chart

Overnight Federal Funds Rate data by YCharts

The jobs report painted a very clear picture that the jobs market is improving rapidly, and in a sustainable manner. We have seen employers add jobs at a very high rate over the past year, but long-term layoffs, and the number of people unemployed because their employer had closed or cut hours due to the pandemic had remained stubbornly high.

Those numbers are still on the high side, but they're falling quickly. The 1.1 million-job decline in layoffs was buoyed by 1 million fewer people reporting they were out of work due to their employer closing or reducing hours due to the pandemic. In other words, businesses are ramping up, and reopening. 

Why it's a potential boon for bank stocks 

This is positive for banks in a number of ways. For Goldman Sachs and JPMorgan, investment banking activity is set to continue at a high pace. Merger and acquisition activity approached $2.9 trillion in the first half of the year, and a hot economy, along with potential tax policy changes, is likely to keep deals happening. Goldman is coming off a record second quarter already in its investment banking business. 

For JPMorgan and American Express, a strong jobs market underpins a continued economic recovery. Consumer spending is on the rise, pushing American Express' revenue up 33% in the second quarter, and almost all the way back to 2019 levels, driven by goods and services spending that's already 16% higher than it was two years ago. Travel and entertainment spending is still down, but the reopening of the economy -- a huge number of jobs added were in restaurants, bars, and entertainment venues -- bodes well for both AmEx and JPMorgan's consumer lending and credit card businesses. 

JPM Total Return Level Chart

JPM Total Return Level data by YCharts

Lastly, rising interest rates. If the jobs market is indeed recovering faster than expected, the Fed could raise interest rates sooner than expected. That's a positive for all three of these companies, which count on lending as important parts of their businesses -- they are banks after all.

What should investors make of this? First off, this was a definitively positive jobs report, with the caveat that rising COVID-19 cases and hospitalizations due to the delta variant are likely to have some impact on the next jobs report, and that could take the wind out of bank stock sails just as quickly as it boosted them this time. 

But for investors looking to build wealth over the long term, a rising interest rate environment would certainly be a boost for banks. We just don't know how soon rates are going to start rising again. But chances are it won't happen before 2022 at the soonest, even if we see continued accelerated gains in future jobs reports.