A Volatile Response to Solid December Jobs

The first jobs report of 2025 was a banger after nonfarm payrolls blew away expectations. And of course, in response to the strong numbers, the S&P 500 … fell? Yep, US stocks slid -1.5% on Friday before a modest rise Monday.^[i] The alleged culprit: Strong hiring will slow or stop future Fed rate cuts, robbing the economy of needed monetary support. But cool down. We have already seen Fed rate cuts aren’t critical for markets or the economy—and nothing about this report foretells the Fed’s 2025 moves.

December’s report was solid. The unemployment rate ticked lower to 4.1% from November’s 4.2%, but the headline grabber was nonfarm payrolls rising by 256,000—trouncing expectations for 153,000.^[ii] Hiring in the health care, government and social assistance sectors led the way while manufacturing dipped by -13,000 (its fourth decline in the past five months).^[iii] Overall, payrolls rose by 2.2 million in 2024 (averaging 186,000 per month), behind 2023’s 3.0 million but ahead of 2019’s 2.0 million gain.^[iv] Even the less-reported U6 unemployment rate—which includes people working part-time for economic reasons and discouraged workers who haven’t sought a job in four weeks—fell to 7.5% from 7.7% a month earlier, the lowest since June.^[v]

Instead of celebrating resilience, though, pundits immediately began fretting over the implications. Most landed on the notion stronger-than-expected data will push the Fed to delay rate cuts, removing a key source of economic support. This stems from the misperceived notion the economy requires rate cuts and lower borrowing costs to support growth.

We think this conventional wisdom is off base. One, monetary policy doesn’t have a predetermined economic effect—for good or ill. The Fed began hiking rates in March 2022 and kept raising them (including some “jumbo” 75 basis point [bp] hikes from June – November 2022), with the final one occurring at July 2023’s meeting. Yet after a -1.0% annualized Q1 2022 contraction (which stemmed from falling exports and government spending and investment, not weak consumer spending or business investment), GDP expanded from Q2 2022 – Q3 2024.^[vi] Moreover, the swiftest growth (4.4% annualized) occurred in Q3 2023—when rates were at their highest (5.25% – 5.50%).^[vii]

From a market perspective, US stocks were already in a new bear market when the Fed’s rate hike cycle started in March 2022.^[viii] That shallow, sentiment-driven decline gave way to a new bull market in October 2022—waaaaay before the Fed’s final, July 2023 hike. On the flipside, rate cuts since the summer haven’t triggered booming markets. See Europe, where the ECB began cutting rates on June 12 last year. For the rest of 2024, eurozone stocks were down -6.4%, well behind global stocks’ 6.1% return.^[ix]

Two, while pundits’ speculating about what the Fed will do next is a well-worn tradition, monetary policy is unpredictable. No one knows how central bankers will interpret the economic data, political backdrop and other variables and act.^[x] Look no further than 2024 to see evidence of this. As we observed last May, fed-funds futures traders in January placed a 0% probability of no change to the fed-funds target range (which at the time was 5.25% – 5.50%) by the April 30 – May 1 FOMC meetings. Most projected the range would fall to 4.75% – 5.00% by that time. But when the April-May meeting came and went, rates were unchanged.

Fast forward to September 19’s meeting. A month before the FOMC’s gathering, traders projected a 76% probability of a 25-bp cut. ^[xi] Heck, a week before the meeting, the probability of a 25-bp cut was at 86%.^[xii] What happened? The Fed cut rates by 50 bps. Not that any of this mattered much to stocks, in our view. The S&P 500 rose 21.1% from the start of 2024 to September’s rate cut, and following the cut, US stocks returned 3.3% through the end of the year.^[xiii]

Friday’s reaction strikes us as normal short-term volatility—not anything to act on. You needn’t go back far to find a US jobs report at the center of a volatile stretch. Global stocks fell sharply in early August last year, due in part to July’s US jobs numbers supposedly warning the Fed was moving too slowly with rate cuts (a Bank of Japan rate hike also contributed to the bounciness). That summertime swoon didn’t prevent global stocks from delivering 20%+ returns last year. 

While jobs numbers often get eyeballs, they don’t reveal anything new to markets. They are late-lagging economic indicators that confirm business decisions companies made months ago—evidence of past growth, not where things are headed. As uncomfortable as market bounciness may feel, the optimal investing decision is to not react, in our view—take a breath and remember enduring short-term volatility is the price for stocks’ long-term gains. Standing there and doing nothing is usually more beneficial than reacting to stocks’ daily swings.