The stock market is still searching for a bottom with the Fed 'far from finished' in driving down inflation

Americans have plenty of savings and should keep spending, JPMorgan Asset Management has said.Justin Sullivan/Getty Images

  • US stocks will likely keep looking for a bottom in the bear market after July’s massive job gains, LPL Financial said Friday.

  • The strong jobs report keeps the Fed on course in fighting inflation with more interest rate hikes.

  • The US economy added 528,000 jobs in July, well beyond expectations of 250,000 jobs.

July’s blowout US jobs report indicates the Federal Reserve has further to run in raising interest rates to cool inflation, leaving the stock market vulnerable to more losses, LPL Financial said Friday.

“That the market has enjoyed a strong move off of the June lows has offered hope that the bear market has bottomed, but with the Fed having to continue its fight towards price stability, the bottoming process most likely is not finished,” Quincy Krosby, chief global strategist at LPL, which has about $1.1 trillion in brokerage and advisory assets.

Stocks soared in July, in part on the view that Federal Reserve Chairman Jerome Powell had signaled the central bank had set its sights on pausing rate hikes as the economy slows down. The S&P 500 in July jumped 9.1% and the Nasdaq Composite climbed 12.3%, their best monthly gains since November 2020. The economy entered a technical recession in the second quarter.

Stocks fell during Friday’s session after the Labor Department said the US economy added 528,000 nonfarm payrolls in July, far outstripping the 250,000 consensus estimate from Bloomberg. Wage growth — a closely watched gauge of inflation – also climbed. Average hourly earnings climbed by 0.5%, higher than the 0.3% estimate. Wages have increased by 5.2% over the past 12 months.

The jobs report indicates the Fed will need to do more to curtail inflation, said Krosby. “With the strength of the labor market, spending power remains intact, and retail sales, while slowing, could pick up steam with gasoline prices continuing to ease, and food prices showing signs of leveling off.”

The Fed has ratcheted up the range of its key borrowing rate from 0% to as high as 2.75% in four interest rate increases this year. Inflation soared to 9.1% in June and the next reading of consumer prices is due August 10.

“Despite the market’s less hawkish interpretation of Fed Chairman Powell’s comments at the July Fed meeting press conference, the seemingly orchestrated parade of Fed speakers this week suggests that the Fed’s job is still far from finished,” said Krosby.

While the June low in stocks provided an attractive trading bottom, “the market needs to wait for ‘the’ bottom,’ she said. “It’s the Bear versus the Fed, and it’s never smart to fight the Fed.”

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