The stock market is turbulent Friday morning as the Dow Jones drops an eye-popping 300 points to start the session. That’s roughly 1 percent of the index’s overall value, coming the day after the Dow’s worst performance since 2020. Meanwhile, the April jobs report is out.
Thursday saw the Dow Jones lose 1,000 points, while the Nasdaq cratered by 5%. The S&P 500 wasn’t far behind, losing over 3.5% in a single day. All of this followed an encouraging Wednesday rally that was spurred on by Federal Reserve Chair Jerome Powell’s statements that the central bank doesn’t plan to institute any 75 basis point interest rate increases this year.
Meanwhile, the April jobs report is out, and it shows that the US economy is just as tight as it has been the rest of the year. The report shows an additional 428,000 new payroll additions in April, against an estimated 38,000. The unemployment rate is now hovering around 3.6%, one of its lowest rates in years. While this sounds like good news, it underscores a deepening problem around the economy: the labor market is tight because companies can’t afford to lose workers right now. It’s hard to find qualified employees, and many Americans are walking away from labor-intensive jobs to seek white-collar opportunities.
Stock Market Takes a Beating
The stock market is turbulent right now due to investor fears regarding inflation and the perception that the US is heading for a recession later this year. “The widely anticipated relief rally seen in equities and bonds post the ‘less hawkish than feared’ Fed on Wednesday was short-lived,” says Emmanuel Cau, a strategist for Barclays.
“Although aggressive 75bp hikes going forward may be off the table, the implied policy tightening cycle ahead is still very hawkish, in our view. Unless surging inflation quickly reverses its course (watch US CPI print next Wednesday), central banks may have no other choice than slowing growth to slow inflation and stay credible.”
The Fed’s ongoing battle against inflation is the backdrop against which investors need to consider their financial moves. The central bank is aggressively pursuing a strategy that will see the dollar drop in value and will keep pushing interest rates higher and rolling back its balance sheet until its plan succeeds.
American workers simply can’t bear the weight of unchecked inflation. The Fed is making moves that are necessary to keep the economy afloat, even if it means slowing economic growth in the short term. The long-term alternative is a full-blown economic depression. Still, many investors worry that the Fed’s tightening policy could result in stagflation, slowing the economy while inflation continues to soar due to global pressures.
The April jobs report showed economists what they already knew: workers are sticking to their white-collar jobs, and the market is as tight as it’s ever been. “Almost 500,000 workers decided to leave the workforce in April. The large decline is a concerning prospect for businesses that are facing one of the tightest labor markets in decades,” writes Peter Essele, Head of Portfolio Management for Commonwealth Financial Network.
“Currently, there are 11.5 million job openings and only 5.9 million unemployed, causing a large mismatch in labor supply and demand that’s fueling wage growth. A further decline in the participate rate could exacerbate the labor supply shortage, resulting in further wage pressures that will inevitably flow through to broad-based inflation.”
Many economists have pointed out that this tight labor environment can only result in higher inflation. As companies fight for qualified workers and struggle to keep up with staffing demands, workers can essentially set their prices. This means that more liquid capital will flow into the economy, further pressuring the already-stressed dollar.
What’s more, unemployment alone isn’t the only measure of economic stability. “So many people seemed to be banking that if we could get unemployment down to 1st quarter 2020 levels, everything would be fine,” says economist Giacomo Santangelo. “What we are finding now is while the unemployment situation has improved on a macroeconomic scale, individuals are facing rising prices that are threatening their standard of living.”
Congress Considers Corporate Tax
Congressional Democrats want to pass a spending package called Build Back Better. However, the lawmakers have struggled to find funding for the program, which was a cornerstone of Joe Biden’s presidential campaign. Now, congresspeople like Senator Elizabeth Warren say they could institute a corporate tax to fund the bill.
“We haven’t gotten it all the way through, but anytime you’ve got something that you can raise revenue on and you’ve got a majority, I believe this is going to happen,” Warren said, describing her push for a new minimum tax on corporations that report to shareholders.
“We’ve got 50 Democrats ready to do this,” Warren said, before noting that things could change on the Capitol’s floor. “So they said, I’ll feel better when they vote.”