Weak Jobs Report Adds to Growing Pile of Stagflation Problems

Market Selloff, Stocks Selloff

A weaker-than-expected February employment report added another negative to a pile of problems that have kept the market under pressure all week.

The economy added 151,000 jobs in February against expectations of around 160,000, and that headline miss was not the worst of it. The household unemployment rate ticked up to 4.1% and prior months saw meaningful downward revisions, with January revised lower by 18,000 jobs. The trend is moving in the wrong direction.

Not that long ago, a weak jobs report might have produced a positive market reaction as it increased the likelihood of Federal Reserve interest rate cuts. That calculus changed dramatically after the bombing of Iran and a surge in oil prices. Brent crude finished the week up more than 18%, the largest weekly gain since the early days of the Russia-Ukraine war. Energy prices at this level have the potential to impact all aspects of the economy over time.

The fear now is that higher energy prices will drive inflation and when that is combined with slowing employment it produces the most dreaded of economic phenomena: stagflation. Economists fear stagflation more than almost anything else because it is genuinely difficult to fix. Dovish monetary policy adds fuel to inflation. Hawkish monetary policy further suppresses economic growth. There is no easy policy move and the Fed knows it. The market is pricing in fewer rate cuts than it was a month ago and that shift matters.

While the economic news is a genuine negative, it probably doesn't move the needle all that much right now because of the extreme uncertainty created by Iran and the ongoing reassessment of AI. There is a steady flow of news on the Iran situation, but most of it suggests the conflict is unlikely to be resolved quickly.

On the AI front, Oracle (ORCL) fell sharply after reports emerged that the company is struggling to secure funding commitments for data center expansion, raising questions about whether the infrastructure buildout that has driven so much of the AI trade is running into real constraints. This is another issue that will remain unclear for a while.

Investors are dazed and confused and made only a halfhearted attempt at dip buying. When the closing bell rang, breadth was abysmal with just 27% of stocks finishing in positive territory and twice as many new lows as new highs. Both the DJIA and the Russell 2000 breached technical support levels with some conviction, and the S&P 500 is barely hanging on to support by its fingertips.

My game plan remains the same: Stay cautious and very patient. There is no reason to believe a bottom is about to form. It is possible, but the smart move is to wait for some indication of sustained buying before putting capital to work. Guessing right on the bottom is a lot less important than not guessing wrong twice.

Have a great weekend. I'll see you on Monday.

At the time of publication, DePorre had no positions in any securities mentioned.