Economic benefits become a nightmare for the market! Strong employment report severely impacts U.S. stocks, Wall Street worries about a "double loss" in stocks and bonds

According to Zhitong Finance APP, on the 10th day of entering 2025, hopes for a smooth rise in U.S. stocks have evaporated. The turmoil at the beginning of this year evolved into a full-scale sell-off on Friday, as traders interpreted the signs of a strengthening U.S. labor market pessimistically, believing that the door to monetary easing would soon close.

The report released by the U.S. Bureau of Labor Statistics on Friday showed that non-farm payrolls increased by 256,000, significantly exceeding the expected 165,000, and the unemployment rate fell to 4.1%. Following the employment report, traders cut back on bets for a Federal Reserve rate cut, leading to a sharp decline in the U.S. stock market and an increase in U.S. Treasury yields alongside the dollar.

The S&P 500 index fell 1.5% on Friday, erasing gains made this year. The benchmark index has accumulated a nearly 2% decline this week, marking the largest weekly drop since Federal Reserve Chairman Jerome Powell's hawkish remarks shook the market last month. Since then, U.S. Treasury yields have continued to rise almost uninterrupted, with the 30-year U.S. Treasury yield briefly exceeding 5%. Bitcoin prices rose, but had previously fallen 9% over the last three trading days.

Good Economic News Turns into Bad News for the Market

Friday's market performance indicates that positive economic news does not necessarily benefit the market and may pose a threat to interest rate-sensitive trading strategies and highly leveraged U.S. companies.

Priya Misra, a portfolio manager at JP Morgan Asset Management, stated, "The past few weeks may well foreshadow the situation for the entire year. It won't be smooth sailing, but rather turbulence and chaos—we are facing multiple factors such as the Federal Reserve's inaction, overvaluation (all asset pricing is based on optimistic sentiment and soft landing expectations), and bilateral policy uncertainty."

Max Wasserman, a senior portfolio manager at Miramar Capital, said, "There is a general belief that the Federal Reserve will continue to cut rates, which is overly optimistic. People are overly reliant on the Fed's put options."

According to data from the world's largest ETF tracking the S&P 500 index and long-term U.S. Treasuries, the total returns of U.S. stocks and bonds have been negative for five consecutive weeks, marking the longest streak of negative returns since September 2023.

Bill Harnisch is one of the few who foresaw this situation. He manages the $1.9 billion Peconic Partners hedge fund, which has significantly outperformed the market with a 192% return over most of the past four years. Due to concerns that both economic weakness and strength could pose risks to bulls, the fund has been reducing leverage, shorting real estate-related stocks, and controlling exposure to tech giants.

Harnisch stated that investors are facing a "double loss situation" in stocks and bonds. He noted that accelerated growth in the U.S. economy could prompt the Federal Reserve to tighten again. "We believe this is a high-risk market."

Neil Birrell, Chief Investment Officer at Premier Miton Investors, stated that hopes at the beginning of this year have been completely dashed.

He said that the strong employment report "is good news for the economy but bad news for those hoping for rate cuts, as inflation remains the Federal Reserve's top priority at the moment. U.S. Treasury yields seem set to continue soaring, which is bad news for the stock market." Interactive Brokers Chief Strategist Steve Sosnick stated that stock traders have once again exposed their "liquidity addiction."

He added, "Stock traders are once again more concerned about the possibility of monetary easing rather than a strong economy that could improve corporate fundamentals."

Is there no chance of a Fed rate cut?

After the release of strong employment data on Friday, economists at several major banks adjusted their forecasts for further rate cuts by the Federal Reserve.

Bank of America previously expected two rate cuts this year, each by 25 basis points, but now anticipates no further cuts, and the next move could even be a rate hike. Citigroup still expects five rate cuts but stated that cuts will begin in May. Goldman Sachs expects two rate cuts this year instead of three.

Gina Bolvin, President of Bolvin Wealth Management Group, stated, "As the market reduces bets on rate cuts, investors may need to prepare for more volatility."

Guy Stear, Head of Developed Markets Strategy at Amundi Investment Institute, stated, "People are now starting to worry that the Fed may not be able to cut rates at all, and pressure is building on the Fed. In the coming months, yields will continue to rise to 5%, and unless the first-quarter earnings season performs strongly, the stock market will face pressure."

Scott Helfstein, Head of Investment Strategy at Global X, stated that we seem to be back in an era where good news is bad news. However, he pointed out that this seems short-sighted.

He stated, "We believe that driven by automation technologies such as artificial intelligence and deregulation, companies can achieve higher earnings expectations this year, which will drive the stock market, not the Fed."

Additionally, consumer and wholesale price data to be released next week will provide more clues about inflation trends for the Fed's policy meeting on January 28-29.

Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, stated, "The unexpectedly strong employment report will certainly not soften the Fed's hawkish stance. Now all eyes will turn to next week's inflation data, but even if these data show unexpected declines, it may not be enough for the Fed to cut rates in the short term."