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This Is What Happens When Good News Is Bad For U.S. Stocks

This Is What Happens When Good News Is Bad For U.S. Stocks

Equities in the U.S. followed their global counterparts into a sharp drop Monday, with the Dow Jones Industrial Average plunging by as much as 357 points, or 2.2 percent, in early trading. But in a counterintuitive twist, the reason for the dramatic sell-off is a piece of seemingly good news.

On Friday, the Labor Department announced American employers added 151,000 jobs in January. That’s less than last year’s monthly average of 228,000 jobs added, but it was enough to push the unemployment rate below 5 percent for the first time since the 2008 recession. Wages also increased in January; the Labor Department reported paychecks were up 2.5 percent from a year earlier.

Generally, new jobs and increased wages are key indicators of the U.S. economy’s health. But for traders around the world, they also could lead to an unwanted result: higher U.S. interest rates.

U.S. Federal Reserve chief Janet Yellen, who is set to speak to Congress later this week, has indicated she would continue to raise interest rates — something she did last December for the first time since 2006 — if the U.S. economy keeps adding jobs and increasing wages. Since that’s what happened last month, fears are growing that the price of borrowing from the Fed will soon get more expensive.

“The wage spike we saw in the jobs report certainly sparked some Fed concerns,” Peter Cardillo, chief market economist at First Standard Financial, told CNBC Monday.

Combine this concern with record low oil prices, and continuing worries about China’s economic slowdown, and the result is the stocks carnage witnessed around the world Monday.

In Europe, London’s FTSE 100 is down 2.7 percent. In Germany, the DAX is 3.3 percent lower. The Dow shed 1.1 percent of its value. This continues the 2016 rout on equities.

“The rate hike by the Fed could not be placed worse from the perspective of investors,” Manfred Huebner, managing director of Sentix, a German firm that measures sentiment among investors, said in a research note circulated Monday. “The U.S. economy is on the verge of a downturn.”

Photo Credit: Spencer Platt/Getty Images