by Professor Jeremy J. Siegel Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Last week's jobs report hit a "sweet spot" for the markets, confirming enough economic cooling to signal potential Fed rate cuts without yet sparking fears of a recession. I expect a 25-basis-point cut from the Fed this week and Powell may set us up for a data-dependent pause in December.
The jobs data came in shy of expectations although this number was distorted by strikes and hurricanes and there were revisions down in both August and September. The unemployment rate was steady when rounded but up almost 0.1 percentage point. It is clear the labor market is slowing, but not collapsing. Additionally, wage growth remains stable and consistent with a 2% inflation trajectory, suggesting productivity gains may be helping keep labor costs in check.
One notable development this month has been the significant drop in employer survey response rates, hitting a 23-year low for the payroll report. While weather disruptions contributed, there’s a secular trend of declining response rates across government surveys, especially the JOLTS report. This undercuts the quality of employment data, a critical tool for the Fed and investors alike. Moving forward, the government needs to incentivize or mandate timely, complete responses to ensure more reliable datasets.
Money supply growth has resumed, showing an annualized rate of 5%, which supports sustainable growth at 2–2.5% in both inflation and real economic terms. Housing and rent prices are stabilizing, and energy prices have found an equilibrium despite a premium due to geopolitical risks in the Middle East. If this stability holds, it will reinforce the Fed’s pathway toward achieving its inflation target.
Bond markets reacted with notable volatility, reflecting both expectations of easing and the influence of this week’s election. Longer-term yields rose above 4.3%, signaling skepticism among bond investors. In particular, the potential of a Republican sweep in the election has pushed yields higher as markets factor in potential fiscal spending plans that could inflate the deficit. If there is a Republican sweep, I can see yields on the 10-year bond jumping 20 basis points that would offset some of the other positives for equities like lower corporate tax rates. However, a divided government could bring some relief to bond markets, as a split Congress typically constrains ambitious spending programs.
In the equity markets, tech stocks showed renewed strength, particularly driven by Amazon’s strong performance. Despite some choppiness in individual tech names, the broader rally in the Magnificent Seven suggests that investor appetite remains robust for these stocks. The bull market in stocks looks set to continue, while bonds face a rougher road. In the near term, stock markets seem poised for further gains, bolstered by resilient earnings and steady economic fundamentals, while bond markets will likely grapple with higher yields and volatility ahead. Investors should prepare for continued strength in equities, and exercise caution in the bond market as rates may rise.
Since Friday, new polls show Harris catching up, making the race a nearly dead heat in the betting markets on Sunday morning. A split government would take some pressure off the bond yields, but long term the trend is higher.
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