Markets Teeter on Job Miss. Investors Shouldn’t Give Up Yet.

After weak jobs numbers were reported, the Fed will almost certainly cut interest rates. On the other hand, the economy is faltering. (Michael Nagle/Bloomberg)

Stocks can only rise for so long if the job market is dragging. A lousy employment report Friday dropped like an anchor, pulling the market down from record territory.

It was the fourth mediocre monthly jobs report in a row. Just 22,000 new positions were added in August, below the 76,500 that were expected. Healthcare was one of the few areas where employment rose, while manufacturing employment fell. June’s jobs numbers were revised into negative territory.

After hitting a new record on Thursday, the S&P 500 index fell 0.3% on Friday to end the week up 0.3%. The Dow Jones Industrial Average fell 0.5% on Friday and 0.3% for the week.

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The good news is that the Federal Reserve will almost certainly cut interest rates multiple times this year to help prop up the economy. Traders see a 67% chance of three rate cuts this year and a 9% chance of a full-point worth of cuts, a move that seemed impossibly remote just days ago.

The bad news is that the economy is faltering. On top of the latest job numbers, other statistics released this past week showed that there are more unemployed Americans than job openings for the first time since 2021.

Worries about a broader economic slowdown are now outweighing the market’s other boogeyman—inflation. Just a few days ago, the 30-year Treasury yield touched 5%. By Friday, it had fallen below 4.8%, and 10-year Treasury yields had fallen to their lowest levels since April, a sign inflation is no longer investors’ main concern.

The weak jobs report was “enough to create the type of economic concerns that would shift the market’s ebullient mood,” wrote Steve Sosnick, Interactive Brokers’ chief strategist, in an email to Barron’s. The weak report comes as stock valuations are “borderline stratospheric,” he added.

Not every part of the market is in a sour mood. On Friday, interest-rate-sensitive industries were on the rise. The iShares U.S. Home Construction exchange-traded fund rose 2.2%. Lower interest rates should lead to lower mortgage rates, which could bring some home buyers off the sidelines. Small-cap stocks were also in decent shape, with the Russell 2000 index rising 0.5%. Small companies tend to carry more floating-rate debt than large-caps, according to Keith Lerner, chief investment officer at Truist Advisory Services. If interest rates fall, those companies can refinance their debt at more attractive rates.

Other stocks also had a good week. Google parent Alphabet soared 9% on Wednesday after a judge said the company wouldn’t have to break up its business despite losing a major antitrust case.

Macroeconomic news will probably dictate trading activity for the next couple of weeks, with stocks in a lull between earnings. The Fed is in a quiet period before its Sept. 16-17 meeting.

As investors await more data, strategists don’t expect the bearish wind blowing through the market to become a full-blown storm. “The bull market has earned the benefit of the doubt,” Lerner says. “We are likely to continue to be in a choppy near-term period, but the employment data today are not enough to start becoming more bearish.”

Still, the market’s momentum has stalled. It may take more than just the Fed to rev it up again.

Write to Avi Salzman at avi.salzman@barrons.com