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Market at Odds with Economy: June Jobs Preview

Pundits are calling the last two months’ rally on Wall Street the most disputed ever. With Covid-19 cases breaking records each day and layoffs continuing, the market somehow continues to grind higher. How will markets respond should June actually show strong job growth?

Economists have a wide range of expectations for the employment report on Thursday, July 2nd. Estimates span from 1.9 million to 9.0 million jobs added in June. This broad range also creates a similar expectation for the unemployment rate with estimates ranging from 10.1% to 14.8%. These projections indicate doubt among experts and if market speculators share the same uncertain perspective, markets will likely react to the news as it is received.

More important to the market than the job figures themselves are the implications for more stimulus. Should we see large employment growth, the government may be less inclined to issue additional stimulus as people are returning to work. There has also been growing debate in Washington regarding a potential extension of unemployment benefits beyond July 31st. This employment report should provide some guidance as to the path forward.

Beyond government stimulus also lies consideration regarding the impact this report will have on the Federal Reserve. Considered by many to be the main driver of this market, the Fed has provided support several times in recent months creating a disassociation between markets and the economy. As a result, rather than focusing on the numbers in the report, many investors will try to extrapolate impact on the Fed’s decisions regarding further stimulus.

As we see the results of June’s hiring, traders should try to separate the economy from the market. If we see 3 million new jobs, that is great news for the economy since many returned to work. However, that may not necessarily be good news for the market since it reduces the chances for more stimulus. It is important to understand this distinction while trading to be prepared for unexpected moves in the market.

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