The July jobs report landed Friday morning, and it was a genuine stinker. The stock market read it, thought it over for about a minute, and threw a party.
Payrolls did not grow by the 83,000 jobs economists expected. They fell by 23,000. That is not a miss. That is a wrong-way sign on the highway.
It gets worse under the hood. May and June were revised down by a combined 103,000 jobs. The recent past got worse while nobody was looking.
The unemployment rate actually fell, to 4.1%, which sounds like the good part until you see why. People stopped looking for work. The share of adults working or job-hunting dropped to 61.4% from 62.2%, and full-time jobs are down 1.3 million over the past year. You can lower the unemployment rate by hiring people. You can also lower it by people giving up. Only one of those deserves confetti.
The market chose confetti anyway. The S&P 500 closed at 7,757.64 — its 26th record close of the year — and finished its best week since April, up 3.6%. The Nasdaq rose 5.2%.
Nvidia (NVDA) gained 12% and added $562 billion of market value in five days — the largest weekly gain any company has ever recorded. Somewhere, a compliance officer needed to sit down.
How bad becomes good
The translation key is the Federal Reserve — the nation’s central bank, which sets interest rates. Under Chair Kevin Warsh it is the most hawkish Fed in years, meaning it leans toward raising rates, not cutting them.
July’s decision to hold rates was 9 to 3 — and all three dissenters wanted a hike. Not a cut. A hike.
Futures markets now price a 58% chance the Fed holds at the next meeting and a 42% chance it raises. Against that backdrop, a weak jobs report works like medicine: it pushes the hike further away. That is how the worst payrolls number in years bought the best week since April. That trade has a shelf life.
The euphoria gauge
Bank of America (BAC) keeps an indicator of investor mood. It hit 9.7 this week — its highest reading since 2021, deep in what the bank considers euphoria territory.
Its strategist, Michael Hartnett, is responding by rotating toward steadier things: consumer staples, real-estate funds and smaller companies. That is the market equivalent of drifting toward the exits while the band is still playing.
We do not think 9.7 rings a bell at the top. Nobody rings a bell at the top. But when the crowd is this cheerful about news this gloomy, the sensible move is to check the list twice and buy nothing out of excitement.
The shrinking workforce
One more thing keeps this from being a simple recession story: arithmetic. The youngest baby boomers turn 62 this year. There are 66 million Americans 65 and older today; in ten years there will be 78 million.
Brookings estimates the economy now needs only about 15,000 new jobs a month to hold the unemployment rate steady — a fraction of the old benchmark. When the workforce itself is shrinking, a soft jobs number is not automatically a siren. But it is not nothing, either.
Next week’s inflation report is the pivot. A cool number lets the Fed stay on hold, and the party continues. A hot number sitting next to falling payrolls hands every strategist in America the word “stagflation” — rising prices and a stalling economy at the same time — and they will use it.
So we end the week holding a record-setting portfolio in one hand and a checklist in the other, and reaching for the checklist.