Jobs Data to Assess US Stock Market’s Soft Landing Prospects – Reuters

By Lewis Krauskopf

NEW YORK – Investor optimism regarding a soft landing for the U.S. economy will face scrutiny next week as the government is set to release key labor market data, following a series of disappointing job reports.

Currently, Wall Street’s benchmark index is up 20% for the year and is nearing a record high, marking its strongest performance from January to September since 1997.

Expectations for a soft landing—where the Federal Reserve controls inflation without significantly harming economic growth—have fueled these gains, especially after a 50 basis point rate cut from the central bank at its recent monetary policy meeting.

However, some analysts express concerns that the recent rate cuts might not be sufficient to prevent a downturn. Wall Street considers the upcoming monthly employment report to be one of the most important indicators of economic health. The last two monthly reports indicated weaker-than-expected job growth, raising the stakes for the data set to be released on October 4.

“Stocks are priced for a Goldilocks/soft landing scenario,” noted Wasif Latif, president and chief investment officer at Sarmaya Partners. “The jobs report could either confirm this expectation or disrupt it.”

Recent payroll reports have caused market turbulence, particularly a surprising slowdown that led to a significant selloff in the S&P 500 in early August. The index has since recovered and reached new highs.

For the September report, analysts anticipate a rise of 140,000 nonfarm payrolls, according to data from the previous Friday. The labor figures will play a crucial role in shaping expectations for the Fed’s next meeting scheduled for November 6-7. Futures linked to the federal funds rate reflect an almost even split between a 25 basis point cut and another 50 basis point reduction.

“While all data carry importance, the incoming labor market data must provide the Fed with greater confidence that the softening trend is stabilizing,” economists at Deutsche Bank said in a recent note.

Investors will also be attentive to remarks from Fed Chairman Jerome Powell, who is expected to discuss the economic outlook before the National Association for Business Economics on Monday.

The substantial gains in U.S. stocks this year set a positive tone for the remainder of 2024, based on historical patterns. Since 1950, whenever the S&P 500 has surged more than 15% through September, it has typically risen a median of 5.4% in the fourth quarter.

Nonetheless, concerns about U.S. economic growth persist among investors. A survey of fund managers earlier this month identified a recession as the top risk for markets, according to research from BofA Global.

Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions, noted that the recent strength in defensive sectors like utilities and consumer staples reflects worries about a potential economic downturn.

Conversely, strong economic data could boost sectors more sensitive to economic conditions, such as industrials and financials. The S&P 500’s industrial sector has gained nearly 11% this quarter, while the financial sector has seen an increase of around 10%.

“There still might be room to argue that we have priced in too much recession risk at this point,” Melson added. “There remains significant potential for further upside as we approach year-end.”