The Stock Market Faces its First Major Test of the Year
As investors enter 2025 with generally upbeat expectations for the U.S. economy, the stock market is poised to face its first major test of the year in the coming week. The crucial jobs report will provide a key indicator of the economic health and labor trends, which are expected to underpin equity gains throughout the year.
The benchmark S&P 500 closed 2024 with a significant 23% rise, posting its biggest two-year gain since 1997-1998. However, stocks wobbled at the end of December and the start of January, cooling off after a torrid run. The market's performance in the coming week will be closely watched as investors seek to confirm their expectations for the year ahead.
Labor Market Data: A Crucial Indicator
The strength of the economy is closely tied to labor market data, which has been volatile in recent months following aerospace industry strikes and hurricanes. November data showed growth of 227,000 jobs that rebounded from a tepid rise in October. The three-month average gain of 138,000 suggests that hiring continues to slow gradually, according to Capital Economics analysts.
The report for December, due out on January 10, is expected to show growth of 150,000 jobs with the unemployment rate at 4.2%, according to a Reuters poll of economists. Angelo Kourkafas, senior investment strategist at Edward Jones, notes that this will be "probably the first clean read of what is the underlying trend in the labor market." Investors are eagerly awaiting the release of this data, which will provide a clearer picture of the economic outlook.
The Federal Reserve's Interest Rate Plans
The jobs report also holds significance for the Federal Reserve's interest rate plans. In its December meeting, the Fed lifted its forecast for expected inflation in 2025, paving the way for higher interest rates than previously forecast. The Fed is expected to pause its easing cycle when it next meets at the end of January before making further cuts of about 50 basis points over the rest of the year.
Investors are wary of an overly strong economy, with a revival of inflation seen as one of the key risks to markets early in the year. As Anthony Saglimbene, chief market strategist at Ameriprise Financial, notes, "Investors are going to want to see confirmation that labor trends remain solid, which means the economic outlook probably remains firm."
Other Employment Data
While the payrolls data will be the most closely followed release, the coming week brings other market-sensitive employment figures. Investors will also be watching reports on factory orders and the services sector, which will provide additional insights into the overall health of the economy.
Art Hogan, chief market strategist at B. Riley Wealth, notes that following the end-of-year holiday period, "next week probably ushers in more robust volumes, which would certainly be a better indication of directionality for the market." A solid jobs report would certainly help turn things around in this market that has otherwise been pretty soft to end the year and start the new year.
Conclusion
The stock market faces its first major test of the year with the release of the December jobs report. Investors are eagerly awaiting the data, which will provide a clearer picture of the economic outlook and underpin expectations for equity gains in 2025. The strength of the labor market is crucial to confirming the economic health and interest rate plans of the Federal Reserve. As investors seek to navigate the coming week's market-sensitive employment figures, a solid jobs report would certainly help turn things around in this market that has otherwise been pretty soft to end the year and start the new year.