Why tomorrow could be a big day for the stock market and the US presidential election | The Motley Fool

A lot will happen next week. The US presidential election will be held on November 5, and a day later the Federal Reserve will begin its November meeting, which will end on November 7, possibly with another interest rate cut. The party that wins the presidency and Congress can dramatically shape policies that affect the market and regulatory environment for certain sectors. Meanwhile, interest rate cuts have been a key theme driving the stock market, so investors are likely hoping the Fed will continue to cut interest rates. But before that happens, new economic data will be released tomorrow that could significantly move the stock market and affect the US presidential race. That’s why tomorrow could be a big day.

A final look at the Fed

On November 1 at 8:30 a.m., the U.S. Bureau of Labor Statistics will release October U.S. nonfarm payrolls data, or the “jobs report.” The jobs report is a snapshot of the US labor market over the previous month and shows the number of jobs added in the US economy, the unemployment rate and other important indicators such as monthly wage growth.

The labor market has been under the microscope as investors believe it holds key clues to inflation and the path of interest rates. The Fed’s intense campaign to raise interest rates appears to have succeeded in bringing down inflation. However, investors are now concerned about the state of the labor market after the Sahma Rule came into force earlier this year. Because unemployment is a lagging indicator, once it starts moving in one direction, it usually doesn’t stop right away. Consumer spending accounts for 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 has contributed to the incredibly high inflation rates seen in recent years.

While unemployment has risen in recent years, it has gone against the grain in recent months and fallen, causing experts and economists to wonder whether the economy is stronger than many believe. If the labor market and U.S. economy are healthy, the Fed may not feel inclined to cut interest rates as much as expected for fear of reigniting inflation, which is still above the Fed’s preferred 2% target.

Last Look at Voters

For voters, Friday’s jobs report is the last major economic indicator and the last look at the economy before they head to the polls on Tuesday. The economy is considered the most important issue for voters in the upcoming election between Vice President Kamala Harris and former President Donald Trump.

Although the data over the past few years and the bull market point to a strong economy, consumers are not feeling it. In June 2022, inflation reached 9%, causing prices to rise on everything from food to transport and housing. The cost of living has become a burden for many Americans and has drained their savings and paychecks. Yes, inflation has slowed, but prices are still rising, so many Americans are still struggling.

Ideally, if the labor market remains strong and inflation declines, the Fed may be able to develop a soft landing scenario. Consumers may feel better if unemployment remains low, wages continue to rise 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 amount to gambling, but it is also not always clear how the market or voters will react to certain economic data.

Nearly 100% of traders (as of October 28) betting on short-term Fed Funds rate futures believed the Fed would cut rates by a quarter point at its November meeting. Keep in mind that percentages are constantly changing. RBC economists expect the U.S. economy to add 164,000 jobs and the unemployment rate to remain stable at 4.1%, although recent hurricanes could affect the numbers. A good jobs report could lead the Fed to leave rates unchanged. Stock prices tend to benefit from lower interest rates, so the market may not react favorably to a strong jobs report. On the other hand, the market is nervous about any data pointing to a recession, although a weaker labor market will likely force the Fed to cut rates faster.

Voters may also be concerned about data hinting at a recession. According to Goldman Sachs (HS -0.97%)An incumbent president has never won an election, even though it was held shortly after the recession that began in 1951.

There is no need to try to calculate anything here. Most long-term investors don’t need to worry about these short-term events. However, investors should be prepared for volatility tomorrow as the jobs report could have a major impact on the market and election polls. Investors will have greater peace of mind if they understand why volatility exists and can therefore make better decisions, whether that means doing nothing or deciding that they may need to reconsider or re-examine a position in their portfolio.