Market Snapshot: Dow ends 400 points higher, but U.S. stocks book weekly losses as investors assess strong jobs report

Need to know: Traders are loading up on bets against the stock market — and this time, it’s not a contrarian signal, says Citi

What’s driving markets?

Stocks swung higher late afternoon Friday, climbing back into positive territory in a volatile trading session that had opened in rally mode after an employment report showed the U.S. economy added 261,000 jobs last month, beating a forecast for 205,000 new jobs.

The jobs report released Friday reflects “the strength of the U.S. economy,” even as the Federal Reserve aggressively hikes interest rates in an effort to reign in high inflation, said Tom Mantione, managing director at UBS Private Wealth Management, in a phone interview.

“I would think that the market would be lukewarm about such a good jobs report,” Mantione said by phone. Lately, “the market has been reacting negatively to positive news about the economy,” he said, as strong economic data stokes investors’ fears that the Fed may need to keep up its aggressive pace of monetary tightening to cool demand and bring the soaring cost of living under control.

Investors found some solace in the fact that the rate of new job creation slowed for the third straight month in October. The headline nonfarm payrolls number was also the lowest print since December 2020, when the U.S. economy saw more than 100,000 jobs disappear.

Market analysts and economists indicated that the jobs data struck a happy medium: not weak enough to hint at a coming recession, while also not being strong enough to pressure the Fed to consider an even more aggressive program of rate hikes, according to Marvin Loh, senior global macro strategist at State Street.

Certain details of the report, including the rise in the unemployment rate and the decline in the labor-force participation, which dipped to 62.2% from 62.3%, suggested that the labor market is beginning to soften, which in turns suggests that the Fed’s inflation-fighting rate hikes are beginning to work, Loh added.

The unemployment rate remains low, rising slightly to 3.7% in October, from 3.5%, according to the jobs report released Friday by the U.S. Bureau of Labor Statistics.

Analysts pointed out that the report hasn’t changed the outlook for Fed policy, which means markets will likely remain volatile as the Fed continues to raise interest rates into next year.

“The net read is that the labor market is still far too tight and cooling only very gradually,” said Alex Pelle, U.S. economist at Mizuho. Fed funds futures markets still anticipate that the Fed’s benchmark rate will peak north of 5% next spring.

Stocks have faced pressure this week after Fed Chair Jerome Powell made clear on Wednesday that the central bank is nowhere near ending a campaign to raise interest rates.

The Fed raised its benchmark rate by 75 basis points, as expected, and Powell told a news conference that it was “very premature to be thinking about pausing.” He hinted that the fed-funds rate may need to surmount 5% and stay there awhile in order to drive inflation back toward the central bank’s 2% target.

Boston Fed President Susan Collins said Friday in remarks to the Brookings Institute that “it is premature to signal how high rates should go.” She said that potential rate hikes of three-quarters of a percentage point and a smaller half percentage point hike are both on the table for the Fed’s December policy meeting.

Read: Why the car market might be ‘the harbinger’ of when the Fed can pivot

Positive market sentiment earlier Friday may have been influenced by speculation linked to China.

“There’s some rumor that the potential exists for a pivot away from their zero-COVID policy, which is why China rallied so strongly,” said UBS’s Mantione. That’s a big deal,” he said, as it could help alleviate inflation pressures.

Chinese tech stocks such as Alibaba Group Holding BABA were trading sharply higher Friday, FactSet data show, while the Hang Seng Index
HSI,
+5.36%
ended 5.4% higher. That brought the index’s rise for the week to 8.7%, its largest weekly percentage gain since late October 2011, according to Dow Jones Market data.

Meanwhile, all three major U.S. indexes are facing weekly losses, with the Dow on pace to fall 2.1%, the S&P 500 on track to lose 4.% and the Nasdaq heading for a 6.5% drop, according to FactSet data, at last check.

U.S. stocks were volatile Friday as weekly and daily options tied to single-stock, stock indexes and exchange-traded funds expired, said Mohannad Aama, a portfolio manager at Beam Capital.

The intraday swings between gains and losses are sign of “skittish” markets, with investors “on edge” about where the Fed’s terminal rate will end up, according to Tom Graff, head of investments for Facet Wealth. “There’s a lot of people trying to make short-term trades, but without very much conviction,” he said.

Meanwhile, value stocks were beating growth equities Friday afternoon, with the Russell 1000 Value index
RLV,
+1.14%
up 0.6%, while the Russell 1000 Growth index
RLG,
+0.56%
was down 0.3%, according to FactSet data, at last check. While both indexes have fallen so far this week, value stocks were still outperforming. The Russell 1000 Value index was showing a weekly decline of 1.8%, while the Russell 1000 Growth index lagged with a 6.5% drop.

“We’re a little overweight value right now,” Graff said.

See also: Live Markets Blog

What companies are in focus?

PayPal Holdings Inc.
PYPL,
-1.88%
stock fell 3.2% after the digital payments group cut its revenue forecast late Thursday.

Starbucks Corp.
SBUX,
+7.94%
shares climbed almost 8% after the coffee giant posted forecast -beating results and said same-store sales will be “near the high end” of financial targets.

Cardinal Health Inc.
CAH,
+5.14%
shares jumped around 4% after the drug and laboratory products distributor reported big beats on profit and revenue and affirmed its outlook.

DraftKings Inc. 
DKNG,
-28.17%
shares tumbled more than 27% after the company posted a third-quarter net loss of $450.5 million, or $1 a share. 

A jump in copper
HG00,
+7.98%
and gold prices helped shares of Freeport-McMoRan Inc.
FCX,
+11.44%
to become the top performer on the S&P 500 Friday with a gain of more than 10%.

—Barbara Kollmeyer contributed to this report.