For much of this year, many experts, banks, and economists have discussed the possibility of a mild recession prompting the Federal Reserve to cut interest rates, which would trigger a risk-on rally for stocks.
But as more data has started to pour in, whether related to the labor market or the Consumer Price Index (CPI), more doubt is now being cast on this thesis. Many people are now worried that inflation might be stickier than initially thought, and the Federal Reserve may need to raise interest rates to levels higher than expected.
Tomorrow, more economic data will come out that will continue to shape this narrative. It could be a huge day for the stock market. Here's why.
The labor market is important
Tomorrow, the U.S. Bureau of Labor Statistics (BLS) will report the number of jobs the U.S. economy added in February as well as other pertinent information surrounding the labor market.
Officials at the Fed and investors have been watching the labor market very carefully, which has been red hot with the unemployment rate in January remaining near historic lows at 3.4%. Fed officials believe the tight labor market is empowering consumers to spend through rising consumer prices, which has made inflation sticky. Fed Chairman Jerome Powell has said previously the Fed would like to see some deterioration in the labor market to know that it's winning its war with inflation.
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However, BLS reported that the U.S. economy added more than half a million jobs in January, which is much more than economists had expected and suggests the economy is still buzzing along at a fast clip. The hotter the economy remains, the less likely it is that there will be a recession or rate cut in 2023 and the more likely the Fed will need to raise interest rates, which has crushed the stock market over the last year.
In public remarks made Tuesday, Powell all but confirmed investors' fears: "The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated."
Harley Bassman, a managing partner at Simplify Asset Management, recently wrote in a blog post that "the demand for Labor cannot be met as boomers retire from the work force for reasons of either age or a (still) plump 401k; and immigration (legal or otherwise) can no longer plug the gap. Every window I see has a 'help wanted' ad."
How Friday's jobs report could impact stocks
The consensus estimates for Friday's jobs report are that the U.S. economy added 200,000 jobs in February and the unemployment rate remained unchanged at 3.4%.
After January's surprise, I think investors will likely be relieved by anything around that 200,000 estimate. But if there's another big jobs number, then I would expect the market to fall Friday because a strong labor market means a stronger economy that the Fed will likely be forced to slow through more interest rate hikes. If the jobs number is in line with the 200,000 or below, stocks may rise because such a number could mean that January's jobs report was an abnormality and the labor market may start to show cracks soon enough.
Either way, I would not recommend trying to time the market. Not only is this extraordinarily difficult, but the market doesn't always react to data in a predictable manner. I would continue to hold stocks that you like on a long-term basis and be prepared for volatility tomorrow so you aren't surprised.
