Stocks Drop After Jobs Report Shows Hot U.S. Labor Market—Here’s Why

Posted by author January 10, 2025 Jobs

Topline

Wall Street reacted negatively to Friday’s better-than-expected jobs report, a seemingly contradictory outcome rooted in the prevailing agita surrounding financial markets about interest rates, wiping out stocks’ post-election gains.

2025 is off to a turbulent start for stocks.

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Key Facts

Stocks dropped sharply following the 8:30 a.m. EST employment update which revealed the U.S. added 256,000 jobs in December, about 100,000 more than consensus economist forecasts, and the unemployment rate dipped to 4.1%, below estimates of 4.1%.

The Dow Jones Industrial Average tanked 1.6%, or about 700 points, by close, while the S&P 500 fell 1.5% and the tech-heavy Nasdaq declined 1.6%.

The Dow and S&P closed at their lowest intraday levels Friday since Election Day, wiping out what was once a 7% post-election rally for the Dow, while the Nasdaq hit its lowest price since Nov. 27.

The bond market selloff was also stark.

Yields for the baseline 10-year U.S. Treasury note shot up about 10 basis points to its highest level since Nov. 2023 at nearly 4.8%; higher bond yields indicate less valuable bonds as investors demand higher interest payments to hold government debt.

Why Are Stocks Down?

Better job growth than anticipated is a hallmark of a strong economy, but the bond and stock market selloffs clearly indicate it’s not what Wall Street hoped to see. That’s because a stronger labor market makes the need for a growth-focused policy move less pressing. Friday’s result plays into the market’s prevailing talking point over the last month on interest rate cuts from the Federal Reserve, which has increasingly hinted 2025 may bring fewer rate cuts than previously forecasted as the economy looks strong without the stimulatory action and inflation concerns linger. The strong December jobs report “could signal to the Fed that there is no immediate urgency to decrease rates further or faster.” Eric Merlis, co-head of global markets at Citizens Financial Group, wrote in emailed comments Friday.

No More 2025 Interest Rate Cuts, Bank Of America Says

“The Fed cutting cycle is over,” Bank of America economists led by Aditya Bhave wrote in a Friday note to clients, calling the “gangbusters” December jobs report the “straw that broke the camel’s back.” BofA economists predicted just last month there would be a pair of rate cuts in 2025.

Key Background

Asset prices dropping in response to robust labor market data is no new phenomenon, occurring across 2022 and 2023 as investors looked for weaker job market data to justify a pivot from the Fed as it hiked interest rates to a two-decade high. The Fed did fully pivot in September, cutting rates for the first time since 2020, but signaled further cuts may be limited following its rate-setting committee’s December meetings. Stocks typically struggle in high-rate environments as profit margins are hurt by higher borrowing costs, while bonds fall as rates rise due to fixed income investors’ falling demand for existing bonds at lower coupon rates. The S&P is down more than 4% from its all-time high set last month, but remains up more than 20% over the past year.

Crucial Quote

“Today’s payroll report is hot, hot, hot…investors may want to brace themselves for more volatility as the market recalibrates expectations for fewer cuts,” Gina Bolvin, president of Bolvin Wealth Management Group, wrote in emailed comments.