Tech Stocks Rally After Jobs Report

Tech Stock Volatility and Economic Indicators

Update: Recent performance of tech stocks indicates a reversal of earlier gains, with both the Nasdaq and our tracked software stock index currently experiencing declines. A shift in market sentiment suggests concerns regarding near full employment and the subsequent rise in interest rates are now dominant.

The Complex Relationship Between Economy and Tech

The interplay between economic news and the valuation of technology stocks has presented a fascinating challenge for analysis in recent months.

One might assume that robust employment figures would foster broad economic optimism, leading to increased investment in technology stocks. Conversely, weaker economic data could logically be expected to generate pessimism and a corresponding decrease in tech stock values, given the sector’s significant role in the modern economy.

However, the reality has proven to be more nuanced than this straightforward correlation.

Federal Reserve Policy and Market Expectations

Prior to the release of the latest jobs report, a key concern loomed over the markets: the anticipated tightening of monetary policy by the U.S. Federal Reserve. This tightening could involve ending the bond-buying program, reducing the balance sheet, and increasing interest rates.

The consequence of rising rates is a heightened attractiveness of bonds and other lower-risk investments. Simultaneously, increased rates are generally expected to diminish the appeal of highly valued tech stocks when considering risk-adjusted returns.

Consequently, a strong jobs report might be predicted to negatively impact tech stocks, while a weaker report could provide a boost. This scenario nearly unfolded today.

Initial Reaction and Subsequent Reversal

The December jobs data released today fell short of expectations (199,000 net new jobs, approximately half the projected figure), initially triggering a sell-off in tech stocks. However, following the market opening, a surprising rebound occurred.

The Nasdaq rose by 0.34%, while the Dow Jones Industrial Average experienced a slight decrease, and software stocks saw an increase of around 0.8%.

The Paradox of Full Employment

What explains this initial decline followed by a recovery in tech stock valuations?

A growing concern is that the U.S. labor market is approaching full employment. This suggests that the disappointing December jobs numbers may not solely reflect a lack of employer demand, but also a shortage of available workers. The ongoing global pandemic undoubtedly contributes to this dynamic.

We are now in a peculiar situation where a negative jobs report could signal a stronger economy – specifically, proximity to full employment – implying continued wage and price increases.

Market Interpretation and Tech Stock Performance

This, in turn, could prompt the Federal Reserve to raise interest rates, potentially leading to a sell-off of higher-risk assets and a shift towards less risky investments. Despite this potential, tech stocks have experienced a modest increase.

This appears to be driven by the market’s assessment that the weaker report will ultimately be beneficial for tech shares, which have recently experienced significant declines. Alternatively, the market may believe the report will be less provocative to the Fed than a stronger showing would have been.

Therefore, tech stocks are currently higher, resulting in a modest increase in wealth for those employed within the industry.