The market was rudely reminded this week of the old adage "don't fight the Fed."
Last Friday, Fed Chair Jerome Powell made it quite clear that the Fed was going to continue to raise interest rates until the economy slowed and inflation was under control.
The market reacted very poorly last Friday to the comments and continued to sell off all week. There was a slight bounce at the close on Thursday in hopes of a favorable reaction to the August jobs report, but that reaction only lasted for a few hours on Friday morning.
The market was pleased that the unemployment rate ticked up to 3.7%, which was higher than the expected reading of 3.5%, but there were also 300,000 new jobs created. What happened is that a large number of people are returning to the workforce, and only some of them have found new jobs. It is likely that the Covid stimulus payments have been depleted, and now there is a need for some income. This was not a weak report and did nothing to slow inflationary pressures.
Investors celebrated the jobs report initially because the higher unemployment rate seemed to signal a slowing economy but the influx of more people looking for jobs covered up the strength.
Larry Summers, who was Treasury Secretary under former president Bill Clinton, said that he would be surprised if the Fed could get to its 2% inflation target without the unemployment rate exceeding 6%.
If Summers is correct, we have plenty of economic struggles ahead, and the market has not discounted that to the extent needed.
As we move forward, the big technical issue will be a potential retest of the June lows. There is a very important consumer price index report on Sept. 13 and not much data until then. We are going to be in a very tough trading environment while we wait.
The good news is that the market is recognizing the obstacles that like ahead. We also have a long weekend to digest the news. Have a great holiday. I will see you on Tuesday.