We get the August jobs report tomorrow.
What's the one thing the Fed has threatened, dating back to March?
Jobs.
With that, over the course of this tightening cycle, negative surprises in the jobs report have been a positive catalyst for stocks.
Why?
Because the weaker picture on jobs served as a signal that perhaps the exuberance was lifting in the economy, that the leverage for job seekers to negotiate higher wages might be abating, and therefore the backdrop for cooling inflation was forming (according to the Fed's plan). And the progression of that formula suggested the Fed's inflation fighting campaign could come to an end, if not reverse.
So bad news was good news.
Fast forward two-and-a-half years, and negative surprises in what has been deteriorating jobs data is no longer good news.
Bad news is bad news.
Why?
With the inflation rate having normalized and economic growth arguably running below potential (given all of the fiscal spending), a rapidly rising unemployment rate may mean the Fed held its foot on the brake for too long — and that damage has been done to the economy.
This all confirms the end of the inflation fight, and puts the Fed in an easing stance, but markets will want to see a Fed response that's aggressive enough to stabilize jobs and economic conditions.
With the above in mind, stocks are already down 2.5% for the month of September, heading into tomorrow's number.
This big trendline we've been watching in stocks dates back to October of last year, when Jerome Powell signaled the end of the tightening cycle.
As you can see, this line broke on August 2nd on the weak jobs report last month. And here we are again, after the V-shaped recovery of that sharp decline last month — stocks are back below this line heading into tomorrow's number.
Add to all of this, the dynamics that exacerbated the selling in stocks in early August remain today (i.e. prospective monetary policy divergence between the Bank of Japan and the Fed — which reduces incentives in the carry trade).
And there may be some seasonal influence on stocks here too. Let's take a look at the past four Septembers (2023, 2022, 2021, 2020).
September 2023 (S&P) was down 5%.
September 2022 was down 9%.
September 2021 was down almost 5%.
September 2020 was down almost 4%.
That's the bad news. Here's the good news.
Each of these bad Septembers was followed by a good fourth quarter.
Fourth quarter 2023 (S&P) was up 11%.
Fourth quarter 2022 was up 8%.
Fourth quarter 2021 was up 12%.
Fourth quarter 2020 was up 12%.