Key Takeaways:
- A strong labor report threatens the stock market with a fresh downturn.
- Will the Fed persist in its hawkish policies with another interest rate hike?
- Cryptocurrencies are not likely to follow the downturn, given the weakened correlation with stocks.
YEREVAN (CoinChapter.com) – The US stock index S&P 500 tumbled nearly 2% ahead of the New York session on July 6 after the latest labor market report showed the US private sector businesses added an estimated 497,000 jobs, significantly higher than the 220,000 jobs economists predicted.
Similarly, The Dow Jones Industrial Average index dropped by 453 points or 1.3%, and the Nasdaq Composite slid by 1.3%.
The labor market is red-hot, says the report – what are the implications for stocks?
The report by ADP Research Institute in collaboration with Stanford Digital Economy Lab concluded that as private hiring surged, layoffs slowed, and filings for unemployment benefits stayed relatively low.
Payrolls also surged, with larger gains in Leisure and Hospitality. Construction, Trade, and Transportation followed with robust increases.
More pain ahead for public market assets like stocks
Generally, low unemployment means a strong economy and capable spenders. However, the labor market boom means more trouble for stocks, as a red-hot economy means the Federal Reserve is no longer in control of inflation.
Thus, market analysts expect Fed Chair Jerome Powell to continue the cascade of interest rate hikes earlier than expected.
In detail, interest rate hikes raise borrowing costs, slow the economy, and the price of assets trading on public markets — like stocks, bonds, cryptocurrencies, and commodities — tend to fall. Thus, more consecutive revisions of the interest rates could potentially drive the stock market into a recession or a so-called “hard landing.”
Rubeela Farooqi, the chief US economist at High-Frequency Economics, expects “payrolls to remain positive for now.” However, the expert forecasted the labor market to cool off once the lagged and cumulative effects of monetary policy trickle through the broader economy.
Conversely, Nick Bunker, a research director at Indeed Hiring Lab, had a more optimistic stance.
The labor market isn’t always going to be this strong. Recessions happen. But today’s data and data from the past several months continue to make a soft-landing scenario increasingly likely.
he noted.
Will cryptocurrencies follow?
Throughout 2022 Bitcoin traded in unison with risk-on assets such as equities. It did not provide a sanctuary for investors seeking to hedge their funds against rising inflation and global economic turmoil.
However, the tables have turned. While Bitcoin started 2023 with a daily correlation coefficient near 0.90 with the S&P 500, Nasdaq, and Dow Jones Industrial Average (DJIA), those have declined.
According to data tracked by crypto derivatives analytics firm Block Scholes, the correlation is now at the lowest level observed since July 2021. At the time, BTC was between its twin peaks in April and November, said Andrew Melville, research analyst at BlockScholes.
James Butterfill, the head of research at CoinShares, also noted the same results, as Bitcoin’s correlation to equities has dropped to 12%. In a May interview, he asserted that “equities never do well, with the prospects of recession, but something like Bitcoin will do quite well because it’s like a monetary policy hedge.”
After decoupling from stocks, cryptocurrencies and Bitcoin, in particular, could emerge as safe-haven assets in the current turmoil. Generally, any asset that provides a hedge from volatility elsewhere could be considered a sanctuary asset.
For example, after the Federal Reserve implemented the mentioned sequence of interest rate hikes in 2022 to curb inflation, investors abandoned the risk-on stock market, betting on the dollar to provide safety. Thus, safe haven status is rather erratic.
