Unemployment & Market Reaction
January 10, 2025
As we step into the new year, I hope it brings health, prosperity, and growth to you and your loved ones.
This morning, the Department of Labor released encouraging data: Total nonfarm payroll employment increased by 256,000, initial jobless claims dropped by 10,250, and the unemployment rate edged lower to 4.1% from 4.2% in December. However, equity markets reacted negatively, with indices trending downward. The reasoning is tied to expectations surrounding Federal Reserve policy. Strong economic data has diminished hopes of rate cuts, leading the market to anticipate the Fed will refocus on controlling inflation— fueled in part by concerns over potential inflationary pressures from the new administration’s policies, including tariffs and other measures.
Let’s pause to examine this further. On the surface, robust economic indicators—particularly in a consumer-driven economy like the U.S.—should support market strength. Low unemployment typically fosters healthy consumer spending. Yet, in the short term, markets often prioritize the trajectory of interest rates over broader economic fundamentals. Interest rates play a central role in shaping asset valuations, driving near-term market sentiment.
As I’ve noted previously, the Fed’s policy direction is a key driver of market sentiment. While the mantra of “higher for longer” dominates headlines, context is key: today’s interest rates remain moderate by historical standards. The 70-year average for the Fed Funds rate is approximately 4.61%, slightly higher than current levels. Comparatively, the near-zero rates of recent years were an anomaly, reflective of extraordinary measures during the financial crisis of 2008 and the COVID-19 pandemic. Today, we are transitioning toward a more normalized rate environment.
Inflation, while still a topic of concern, has moderated significantly. The current inflation rate of 2.75% is close to the 20-year average of 2.54%, markedly below its peak of 9.06% in June 2022. It’s important to differentiate inflation rates from price levels: inflation measures the pace of price increases, not the absolute price level. Once prices rise, they are unlikely to decline significantly, as deflation poses its own risks to economic stability. The current inflation trajectory suggests stabilization, aligning with longer-term averages.
Interest rates continue to significantly influence asset valuations. While higher rates increase borrowing costs, impacting corporate and personal cash flows, their primary influence lies in valuation models. Over the long term, however, fundamental economic drivers such as GDP growth, low unemployment, revenue and earnings growth, and rising dividends take precedence in determining valuations.
As we navigate market volatility, it’s important to focus on long-term trends rather than short-term noise. By staying disciplined and grounded in fundamentals, we position ourselves to capture healthy growth over time.
Wishing you a successful and fulfilling year ahead.
Alpha Capital Wealth Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
