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It's official. The S&P is off to it's worst start since 2016. For anyone who pays attention to economic report releases you may be asking, "If the unemployment numbers fell significantly below expectations (4.1% expected 3.9% actual) isn't that GOOD news? Why did the market react poorly?" Sure, the unemployment numbers are great for the country. It means that despite Omicron, the employment situation has VASTLY improved. It's in fact the most significant drop in unemployment numbers EVER over the last 18 months. It's important to remember that the market is not the economy. What does the market see when it's looking at a larger than expected drop in unemployment? Since late 2020 the Federal Reserve has maintained that it would continue providing liquidity and refrain from raising rates "until full employment has been achieved." This is in fact one of two direct mandates the Fed has to direct their actions. The other is to maintain a target rate of inflation. These two goals have very frequently gone hand in hand until recently. The supply chain shock and general weirdness of COVID put the Fed in a position where their two goals were at odds with one another. If they continued to provide liquidity through asset purchases it would accelerate the economy therefore pushing job growth but with the consequence of continuing to accelerate inflation. The Fed remained steadfast with Powell strictly committing to continue pursuing full employment. As long as unemployment remained high the market was able to remain confident that the Fed would be true to it's word and not raise interest rates. So in the eyes of the market high unemployment means a lower chance of a rate hike while lower unemployment means a greater chance for a rate hike. After the unemployment numbers exceeded expectations the bond market proceeded to price in an 88% likelihood of a March rate hike. In market terms that's a virtual consensus. That also had an effect on the stock market where once again high valuation growth stocks were the hardest hit while value stocks finished green once again. I know it can be totally confusing to see the market react negatively to what looks like good news. It's important to remember that while the market and overall economy share many goals they also differ on many. The Fed has the power to swing the market in whichever way it deems necessary in order to achieve it's dual mandate of full employment and controlled inflation. Now that the market has seen unemployment drop below 4% it knows what's next. I would fully expect a 0.25% rate hike before the end of March. #unemployment #federalreserve #learing #tcardizzle //// Need help figuring out the market? Join us on discord
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