A lot is going on next week. The U.S. Presidential Election is on Nov. 5 and the Federal Reserve kicks off its November meeting a day later, which will end on Nov. 7 potentially with another interest rate cut. The party that wins the presidency and congress could dramatically shape policies impacting the market and the regulatory landscape for certain sectors. Meanwhile, lower interest rates have been a key theme driving the stock market, so investors are likely hoping that the Fed keeps lowering interest rates. But before this happens, new economic data will come out tomorrow that could move the stock market significantly and impact the U.S. presidential race. Here's why tomorrow could be a big day.
A last look for the Fed
At 8:30 a.m. on Nov. 1, the U.S. Bureau of Labor Statistics will release October data for U.S. nonfarm payrolls, or the "jobs report." The jobs report is a snapshot of the U.S. labor market for the prior month and shows the number of jobs the U.S. economy added, the unemployment rate, and other important metrics like monthly wage growth.
The labor market has been under a microscope, as investors believe it holds key clues for inflation and the trajectory of interest rates. The Fed's intense interest rate hiking campaign seemingly succeeded in bringing down inflation. However, investors are now concerned about the labor market after it triggered the Sahm Rule earlier this year. Because unemployment is a lagging indicator, once it starts moving in one direction it usually doesn't just stop immediately. Consumer spending powers roughly two-thirds of the U.S. economy, so the strength of the consumer -- and therefore the labor market -- is a key determinant of gross domestic product and inflation. A historically strong labor market fueled the incredibly high levels of inflation experienced in recent years.
While unemployment has climbed in recent years, it has gone against the grain in recent months and decreased, making experts and economists wonder if the economy is stronger than many believe. If the labor market and U.S. economy are on good footing, the Fed may not feel inclined to drop interest rates as much as expected in fear of reigniting inflation, which is still above the Fed's preferred 2% target.
A last look for voters
For voters, Friday's jobs report is the last major economic indicator and a last glimpse at the economy before they head to the polls on Tuesday. The economy is considered the single most important issue for voters in the upcoming election between Vice President Kamala Harris and former President Donald Trump.
While data over the past few years and the bull market indicate a strong economy, consumers are not feeling it. Inflation reached 9% in June of 2022, driving up prices on everything from food to transportation to shelter. The cost of living has become a burden on many Americans and drained their savings and paychecks. Yes, inflation has slowed, but prices are still increasing so many Americans are still struggling.
Ideally, if the labor market stays strong and inflation comes down, the Fed may be able to engineer a soft landing scenario. Consumers may feel better about their situation if unemployment remains low, wages keep rising, and prices stabilize, but this will take time.
The stakes are high
I would never recommend trying to position a portfolio or buy/sell stocks by timing the market. Not only does this equate to gambling, but it's not always clear how the market or voters will react to certain economic data.
Nearly 100% of traders (as of Oct. 28) betting on short-term futures on the federal funds rate believed the Fed will cut rates by a quarter-point at its November meeting. Keep in mind that percentages are constantly changing. Economists at RBC expect the U.S. economy to add 164,000 jobs and unemployment to hold steady at 4.1%, although the recent hurricanes could impact numbers. A strong jobs report could result in the Fed leaving rates unchanged. Stock prices tend to benefit from lower interest rates, so the market may not respond positively to a strong jobs report. On the other hand, the market has been jittery over any data indicating a recession, even though a weaker labor market would likely lead the Fed to cut rates faster.
Voters may also be jittery about data hinting at a recession. According to Goldman Sachs(NYSE: GS), the incumbent president has never won an election when it took place shortly after a recession, dating back to 1951.
There's no need to try and time anything here. Most long-term investors don't need to worry about these short-term events. However, investors should be prepared for volatility tomorrow because the jobs report could move the market and polling for the election in a big way. Investors will be calmer if they understand why there is volatility, and therefore be in a better place to make decisions, whether that means doing nothing or deciding that maybe they need to reexamine or double-check a position in their portfolio.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.
