Did the Jobs Report Just Signal a Correction?

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In what ended up being a nice surprise for bulls, the January jobs report shattered expectations – seeing a 304,000 new job rise for the month, even in the midst of a lengthy government shutdown. In the report released by the U.S. Labor Department on Friday morning, unemployment did rise slightly to 4 percent – a level it touched back in June 2018 – but overall, the numbers came as a huge (positive) shock.

More surprising was the fact that during the shutdown (and subsequent partial re-opening), 1,000 new federal employees were added to the system. Analysts, bewildered by the slew of new jobs, only predicted nonfarm payrolls to increase by 170,000 for the month. The actual numbers beat that estimate by almost 80 percent.

Overall, the January jobs report was a triumph. Economists have been expecting slowed growth for 2019 – something that’s still certainly in the cards – but based on what we’re seeing from the U.S. Labor Department these days, things aren’t slowing as quickly as many experts may have initially thought.

The one major negative from the report, however (besides a slight uptick in unemployment), was the revision made to the December numbers, which detailed a job gain of 312,000. After some double-checking, the Labor Department found that only 222,000 jobs had been added, a 29 percent decrease. On the positive side, though, there was also a revision to the November estimates, rising from the reported 176,000 new jobs to 196,000. In total, the audit shaved 50,000 jobs off the reports from 2018 – a year where the average monthly gain was 223,000.

Jim Baird, chief investment officer for Plante Moran Financial Advisors said in a note, “Certainly, the economy has slowed, and that will undoubtedly be apparent in other data in the coming weeks. Still, the jobs market remains a bright spot. Employers are still hiring at a strong pace. That’s good news for the consumer sector, and ultimately good news for the economy.”

And while seeing job growth will certainly make bulls happy, the fact is that another great report will likely cause the Fed to start raising interest rates again – something investors unilaterally fear.

By seeing continued signs of economic prosperity, Fed Chairman Jerome Powell may have gotten the sign he needed to “release the hounds”. When the going is good, the market can usually absorb the shock of an interest rate hike, after all.

But remember, we’re still smack-dab in the middle of a bear market, even if the massive post-Christmas rally has been extended. If the economy keeps posting strong numbers month-after-month, the Fed will undoubtedly keep turning the screws, possibly sending equities into a tailspin as investors jump ship.

So, while it’s exciting as an investor to see another top-flite jobs report, the truth is that it could ultimately be this rally’s undoing, serving as bait for a hawkish turn from Powell. If the market’s set to escape its bear status, it’ll need continued low-interest rates to do so. What we’ve seen from the Fed in the past, however, tells us that’s not likely to happen in 2019 if we see more signs of growth, which at this point looks certainly possible.

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