The next jobs report will be the most important in recent memory. Here's why it could be a make-or-break moment for the stock market's red-hot rally.
- Stocks soared to record highs last week after the Federal Reserve signaled it was open to cutting interest rates if the economy weakens. That sets up the July 5 jobs report as a critical moment for the market.
- A weak report with minimal hiring would all but confirm that a rate cut is on the way as early as July, but an unexpectedly strong report might convince the Fed not to act for now.
- While stocks have rallied, bond and gold prices have also hit all-time highs as investors looked for safer options in response to hints of a slowing economy.
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Under other circumstances it could have been a sleepy post-holiday summer Friday. But as it stands now, July 5 could be a make or break moment for the rallying stock market.
That's the day the Labor Department will put out its next jobs report. It's going to be a crucial one because it could either confirm the basis of the recent market surge, or dramatically reverse it.
"It's the type of report that could send the market either spiraling or rocketing," JJ Kinahan, chief market strategist for TD Ameritrade, said in an interview with Business Insider. He added that trading desks will be lightly staffed after the Independence Day holiday, which could suppress volume and lead to greater daily volatility.
Over the past few weeks, investors have reacted to growing concerns about the economy and trade war fears by buying government bonds and gold, sending the prices of each to multi-year highs. Meanwhile, hope that the Fed will step in to rescue the economy gave the stock market a lift that helped the S&P 500 set new records.
Another shaky jobs report, following weak data in May, would suggest investors have read the situation correctly, which could amplify trends. It would make it much more likely the Fed will cut interest rates on July 31, something investors badly want to see.
Kinahan said investors will pay more attention to the report to see "if this is the beginning of a trend" of weaker hiring.
A strong report would do the opposite, suggesting the Fed doesn't need to lower interest rates so urgently because the economy's health hasn't deteriorated. That might convince Fed leaders to change course and leave rates alone for now, and even pave the way for the Fed to resume increasing them in the near future.
With Wall Street betting heavily on a rate cut, and convinced the bull market needs one, that could send stocks sharply lower. It would also challenge the reasoning behind the trades of the last few weeks: Relatively higher interest rates would challenge the low bond yields and a more optimistic view on the economy might push some investors away from gold.
It might not take much to convince Fed leaders to change course and leave rates alone, or even resume increasing them in the near future. That could make the next few weeks treacherous.
While it might lead to turbulence, Kinahan said investors shouldn't get too upset if they have to change course in response to a healthier economy.
"The only reason you lower rates is because you're trying to spark the economy," Kinahan said. "People have to be a little bit careful what we wish for as far as rate cuts."