The U.S. stock market experienced a much-needed rebound on Friday, driven by a surge in expectations for an interest rate cut by the Federal Reserve. This optimism stemmed from a surprisingly weak October jobs report that painted a grim picture of the U.S. economy, further fueling concerns about a potential recession.
The report revealed that the U.S. economy added only 12,000 jobs in October, marking the lowest monthly pace since December 2020 and significantly missing estimates of 113,000. This stark contrast to September’s robust job growth of 211,000 sent shockwaves through the market.
The market’s reaction was swift and decisive. The CME FedWatch tool, which tracks market expectations for Fed policy, now reflects a full probability of a 25-basis-point rate cut at next week’s Federal Reserve meeting. The likelihood of another cut in December has also surged to 85%, indicating a strong belief among market participants that the Fed is poised to loosen monetary policy to stimulate the economy.
Hurricane Disruptions and Strikes Add to Economic Gloom
Beyond the dismal October employment figures, the report highlighted the significant disruptions caused by natural disasters and labor disputes. Hurricane Helene, which hit Florida’s Gulf Coast on Sept. 26, followed by Hurricane Milton on Oct. 9, led to widespread evacuations and significant disruption to multiple economic sectors. These events undoubtedly impacted employment estimates in various industries, according to the Bureau of Labor Statistics (BLS).
Adding to the economic headwinds, manufacturing layoffs surged in October, reaching 46,000 — the highest since 2009, excluding the pandemic months of March and April 2020. The BLS attributed this surge primarily to strike activity in the transportation equipment manufacturing sector.
Stock Market Responds Positively to Rate Cut Hopes
Despite the bleak employment outlook, the stock market reacted positively to the rising expectations for Fed rate cuts. The SPDR S&P 500 ETF Trust (SPY), tracking the S&P 500 index, rebounded 0.7% after Thursday’s 1.9% slump. The tech-heavy Invesco QQQ Trust (QQQ), replicating the Nasdaq 100, was 0.6% higher.
Small caps outperformed, with the iShares Russell 2000 ETF (IWM) soaring 1.2%. The Roundhill Magnificent Seven ETF (MAGS) rose 1.4% after experiencing a sharp 3.9% decline on Thursday, its steepest one-day drop since late July.
Sector-wise, the Consumer Discretionary Select Sector SPDR Fund (XLY) led gains, up over 2%, fueled by a 6% post-earnings rally from Amazon.com Inc. (AMZN). The Direxion Daily AMZN Bull 2X Shares (AMZU) skyrocketed by 13%.
Rising expectations for Fed rate cuts also fueled gains in real estate industries, with the iShares U.S. Home Construction ETF (ITB) rising 1.8%. Semiconductors rebounded after tumbling by 3.9% on Thursday, with the iShares Semiconductor ETF (SOXX) rising 1.6%. Intel Corp. (INTC) was among the best performers following better-than-expected results.
The SPDR Gold Trust (GLD) – the biggest physically-backed gold ETF – also rose 0.5%, rebounding after Thursday’s 1.6% decline. The United States Oil Fund (USO), which tracks West Texas Intermediate (WTI) crude performance, gained 1% amid rising geopolitical tensions in the Middle East following Iran’s retaliatory attack on Israel.
While the October jobs report painted a gloomy picture of the U.S. economy, the market is clearly betting on the Fed’s willingness to cut rates and provide much-needed support. However, it remains to be seen whether the Fed will act decisively enough to avert a potential recession.
