Everything You Need to Know About the October Jobs Report - Wall Street Journal

Stocks are facing a test after the Federal Reserve cut interest rates for the third time this year.

Going back to 1982, stocks have produced higher-than-average returns when the Fed has finished its easing cycle at the third rate cut, according to Strategas. But they’ve produced either middling or negative returns when the Fed has had to ease monetary policy further.

In 1985, for instance, the Fed delivered its third and final rate cut of the cycle in an effort to prevent a slowing economy from tipping into recession. The S&P 500 rose 11% over the following six months, Strategas says. The market similarly rose after a series of rate cuts that culminated in 1988.

The 2000s were a different story. The Fed deployed its third rate cut of the cycle in March 2001, following a tumultuous selloff in the stock market and a dropoff in consumer confidence. That wouldn’t turn out to be enough. The central bank wound up lowering interest rates 10 more times, the U.S. economy entered a relatively brief recession and the S&P 500 fell 3.8% over the following six months.

Stocks similarly took a hit after the Fed cut rates for a third time in December 2007. That wasn’t surprising given the fallout from the collapse of the subprime mortgage industry was pushing the U.S. economy into what many consider the worst financial crisis since the Great Depression. (The central bank wound up lowering interest rates seven more times before pausing and undertaking extraordinary easing measures that included buying trillions of dollars of debt.)

If more rate cuts are needed, “then something is very wrong with the economic backdrop, which will eventually weigh on equity performance,” said Todd Sohn, director of technical strategy at Strategas.

Which scenario is the U.S. bull market in at the moment? The Fed hinted it was done lowering rates for now Wednesday. Some analysts, though, believe it left its language vague enough that it gave itself room to act if the manufacturing sector, the labor market or consumer confidence deteriorates significantly between now and year-end. Friday’s jobs data will give investors a look at whether recent cooling in the pace of hiring looks like it’s here to stay.

For now, Mr. Sohn points to recent breakouts in shares of European industrial companies, global auto stocks and semiconductor stocks, all groups that tend to rise when economic conditions are stronger.

“We’ve understood from the last year and a half that the global backdrop has deteriorated. But these cuts are supportive, and they look like what’s needed to help things keep afloat,” Mr. Sohn said.

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Everything You Need to Know About the October Jobs Report - Wall Street Journal
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