There's more downside ahead for the stock market as recent data pointing to a strong labor market means the Fed won't be sending any dovish signals, UBS says

• Labor-market strength will likely prevent the Federal Reserve from signaling a shift toward rate cuts, UBS said Wednesday.
• "The economy is slowing, but unlikely fast enough to prompt a policy pivot," the top global investment officer at UBS Wealth Management said.

The Federal Reserve hasn't reached a place where it can signal a shift toward rate cuts as the US job market remains strong, and that likely means more downside pressure ahead for stocks, said UBS.

"The economy is slowing, but unlikely fast enough to prompt a policy pivot," wrote Mark Haefele, global chief investment officer at UBS Wealth Management, in a note Wednesday ahead of the Federal Reserve's November policy decision.

Solid job vacancies — illustrated in the government's Job Openings and Labor Turnover Survey released Tuesday — are likely to support the Fed's campaign to ratchet up interest rates to cool inflation by slowing activity in the world's largest economy, UBS said. It noted wage growth could remain elevated as there were 1.9 job openings for every unemployed worker.

The Bureau of Labor Statistics said Tuesday its JOLTS data showed an increase in US job vacancies to 10.7 million in September. Vacancies had been expected to fall to 9.9 million, according to an Econoday survey of economists.

Also, while the ISM manufacturing PMI for October indicated waning inflationary pressure at the producer level, the overall index remains in expansionary territory.

"So, we continue to think that it is too early to expect the Fed to signal a more dovish stance, and we do not think the risk-reward currently favors a sustainable rally in equities," Haefele said. "We focus on mitigating near-term downside risks while retaining upside exposure for the medium and long term."

Stocks jumped last month as investors anticipated the Fed may suggest it's preparing to end its run of rate hikes and start thinking ahead to rate cuts as economic activity falters.

The S&P 500 finished October with a gain of nearly 4%, logging its best monthly performance since January 1976 and its strongest October on record. The moves allowed the benchmark to trim its steep year-to-date loss, which stood around 19% on Wednesday.

Stocks slipped ahead of the Fed's policy announcement on Wednesday, with the S&P 500 hovering around 3,832, down 0.4%. The Fed has raised interest rates by 3 percentage points this year in five rate hikes, including three sized at 75 basis points. The fed funds rate currently sits in a range of 3% to 3.25%.

Investors should consider focusing on defensive sectors like consumer staples and healthcare, while investing in investment-grade bonds, Haefele said.

"We hold a least preferred view on technology and note that the FANG+ index of mega-cap tech stocks has now dropped to a two-year low, down 46% from its peak a year ago," he said.