Market Recap 5/3/2024: Stocks Rally as Cooler Jobs Report Fuels Rate Cut Hopes

U.S. stocks advanced for a second straight week as a weaker-than-expected April jobs report bolstered hopes for a Federal Reserve rate cut later this year. The Dow Jones Industrial Average climbed 1.18% to close at 38,675.68, while the S&P 500 gained 1.26% to 5,127.79. The tech-heavy Nasdaq Composite led the way, surging 1.99% to 16,156.33.

Key Takeaways

• Dow rises 1.18% to 38,675.68, S&P 500 gains 1.26% to 5,127.79
• Nasdaq outperforms, jumping 1.99% to 16,156.33
• April jobs growth cools to 175,000, missing 235,000 estimate
• Unemployment rate ticks up to 3.9%, wage growth slows
• Apple, Amgen earnings impress; tech and healthcare stocks rally
• Investors bet on Fed rate cut as economy shows signs of softening

Jobs Report Hints at Cooling Economy

The main catalyst for the market’s rally was the Labor Department’s April jobs report, which showed that U.S. employers added just 175,000 jobs last month, well below the 235,000 consensus estimate. The unemployment rate also ticked up to 3.9% from 3.8%, while wage growth moderated, suggesting that the red-hot labor market may finally be starting to cool.

Investors cheered the softer-than-expected data, seeing it as a sign that the Federal Reserve may have room to cut interest rates later this year if the economy continues to slow. The prospect of looser monetary policy helped fuel a broad-based rally, with all 11 sectors of the S&P 500 finishing in the green.

Tech stocks were among the biggest beneficiaries, with the sector getting an extra boost from blowout earnings reports from Apple and other industry heavyweights. 

Shares of the iPhone maker surged more than 5% after the company reported record revenue and profit for the March quarter, driven by strong demand for its high-end devices and services.

Healthcare Stocks Shine on Amgen Results

Healthcare stocks also outperformed, led by a stunning rally in shares of biotech giant Amgen. The stock soared more than 10% after the company reported better-than-expected earnings and raised its full-year guidance, citing strong demand for its drugs and success in its pipeline of new treatments.

The sector’s strength was broad-based, with pharmaceutical companies, insurers, and medical device makers all posting solid gains. Investors appear to be betting that the industry will benefit from a combination of an aging population, rising healthcare spending, and a more favorable regulatory environment.

Financial stocks, meanwhile, turned in a mixed performance as investors weighed the potential impact of lower interest rates on bank profits. While some banks could benefit from a steeper yield curve and a pickup in lending activity, others may see their net interest margins compress if rates fall too far too fast.

In a novel twist on the traditional hedge fund model, Hunterbrook Media is blending the worlds of finance and journalism to gain an edge in the market. The innovative startup aims to leverage investigative reporting to uncover potentially market-moving stories before they hit the mainstream, allowing it to profit from the resulting price swings.

Rocket Mortgage Short Sputters

One recent example of Hunterbrook’s strategy in action was its high-profile bet against United Wholesale Mortgage (UWM) and in favor of rival Rocket Mortgage. The firm published an investigative piece that alleged accounting irregularities at UWM, leading it to short the stock and go long on Rocket.

However, the market’s reaction to the report was mixed, with UWM shares initially tumbling but then quickly recovering. The episode highlights the challenges of trying to profit from investigative journalism in a complex and often unpredictable market.

Conservative Investors

With signs of a slowdown in the labor market and the potential for a Fed rate cut on the horizon, conservative investors may want to consider adding some duration to their bond portfolios. Look for high-quality corporate and municipal bonds with maturities in the 5-10 year range, which could benefit from falling rates.

Growth Investors

Growth investors may want to focus on sectors that are benefiting from long-term secular trends and have proven their ability to generate strong earnings growth even in a slower economy. Technology and healthcare are two areas that fit that bill, with companies like Apple, Amgen, and Microsoft showing impressive resilience.

Opportunistic Investors

For investors with a higher risk tolerance, the recent rally in stocks may present an opportunity to take some profits off the table and redeploy capital into areas that have lagged the broader market. Financials and industrials are two sectors that could benefit from a pickup in economic activity later in the year.

Our Take: Soft Landing Scenario Gains Traction

The April jobs report is the latest in a string of data points suggesting that the U.S. economy is slowing, but not collapsing, as the Federal Reserve’s aggressive rate hikes of the past year start to bite. While the labor market remains tight by historical standards, the moderation in job growth and wage gains is a encouraging sign that inflationary pressures may be starting to ease.

At the same time, the strong earnings reports from the likes of Apple and Amgen show that corporate America is proving resilient in the face of economic headwinds. With many companies sitting on record amounts of cash and enjoying strong demand for their products and services, the risk of a sharp downturn in profits appears to be receding.

Of course, risks remain. The looming debt ceiling showdown in Washington could rattle markets if politicians fail to reach a deal, while geopolitical tensions in Ukraine and the Middle East could flare up at any time. 

And with valuations still elevated by historical standards, any disappointment on the earnings front could trigger a sharp selloff.

But for now, the weight of the evidence suggests that the U.S. economy is on track for a soft landing, with growth slowing to a more sustainable pace without tipping into recession. 

That would be a goldilocks scenario for investors, allowing the Fed to take its foot off the brake without risking a new flare-up of inflation.

In the week ahead, investors will be closely watching the latest readings on inflation and consumer sentiment for further clues on the economy’s trajectory. With expectations high after the recent string of positive surprises, any disappointment could be met with a swift and sharp market reaction.

Earnings season will also remain in focus, with reports from Disney, Uber, and Beyond Meat among the highlights. Investors will be listening closely to management commentary on the outlook for demand and costs, as well as any hints of further layoffs or restructuring plans.

All eyes will be on the Federal Reserve’s rate-setting meeting on Wednesday for fresh clues on the central bank’s policy outlook. While no change in interest rates is expected, investors will be parsing the statement and Chair Jerome Powell’s press conference for any hints of a dovish tilt.

On the economic front, the April consumer price index (CPI) will be the main event, with economists expecting a modest 0.4% rise in the headline number and a 0.3% uptick in the core reading. A higher-than-expected number could reignite concerns about inflation and weigh on risk assets.

The April retail sales report will also be closely watched for signs of cooling consumer demand, while industrial production and housing starts data will provide clues on the state of the manufacturing and residential real estate sectors.

Geopolitical tensions will also remain in focus, with the ongoing war in Ukraine and simmering U.S.-China trade tensions threatening to derail the market’s fragile recovery. Investors should stay nimble and be prepared to adjust their portfolios as conditions evolve.

Views expressed here should not be considered personal investment advice.

Sources:

CNN

Investopedia

Wral