Strong hiring and falling unemployment sound like good news. So why could October's jobs report be bad for stocks, bonds, and the AI trade?
KEY TAKEAWAYS
October hiring substantially exceeded expectations. Employers added 165,000 jobs against forecasts of 70,000, while revisions to the previous two months added another 84,000 jobs.
Unemployment declined despite an expanding labor force. The unemployment rate fell to 4.1% from 4.2%, even as 421,000 additional people entered the labor force and household employment increased by 463,000.
Wage growth continues to trail inflation. Average hourly earnings rose 0.4% in October, but annual wage growth of 3.1% remained below the latest 3.7% consumer inflation reading.
Labor-market gains remained concentrated, while underemployment increased. Professional and business services added 70,000 jobs and health care added 42,000, while the number working part-time for economic reasons increased by 339,000 to 4.8 million.
The employment report increased expectations for another Federal Reserve rate hike. Markets are now focused on tomorrow's October CPI report, where missing October 2025 price observations complicate year-over-year comparisons and monthly core inflation forecasts range from approximately 0.2% to 0.3%.
MY HOT TAKES
One blockbuster jobs report doesn't erase a year of mediocre hiring. The labor market may have hit a three-sewer home run in October, but the season's batting average still deserves scrutiny.
Wall Street is celebrating wage growth that Main Street cannot actually spend. When inflation outpaces pay increases, workers may be earning more dollars without gaining purchasing power.
A truly strong labor market shouldn't need two sectors to carry the entire team. Concentrated hiring, rising involuntary part-time employment, and weakness in hospitality suggest the underlying economy is less robust than the headline implies.
The Fed faces an increasingly uncomfortable choice between containing inflation and protecting workers. Another hike may be justified by the employment headline, but the underlying labor data suggest further tightening carries meaningful economic risks.
Investors betting simultaneously on an AI rebound and lower interest rates are making two interconnected bets. A hotter-than-expected CPI report could undermine both assumptions, making portfolio concentration a much bigger risk than it appears.
You can quote me: “Wall Street saw a hot wage number and worried about inflation. Main Street saw a 3.1% raise against 3.7% inflation and worried about the electric bill.”
Swing for the far sewer. On the block where I grew up, nobody measured a hit in feet–no. We actually measured it in sewers–the manhole covers running down the middle of the street like mile markers. One sewer was a single. Two sewers and you were a hero until dinner. Three sewers–THREE–and somebody’s mother came out onto the stoop to see what all the yelling was about. The broom handle was borrowed (usually without asking), the Spaldeen was half bald, and the parked cars were the foul lines, which meant every big hit came with an argument. Because there was always one kid–every block had one–who waited for the cheering to die down and then asked the only question that mattered. Was it FAIR, or was it FOUL? I was not always the kid who hit the ball three sewers–in fact I can’t ever remember hitting a 3-sewer even once. I was, more often than I’d like to admit, the kid who asked the question. On Friday morning at 8:30 AM Wall Street Time, the Bureau of Labor Statistics slugged one three sewers, and I found myself, decades later and in a much better suit, walking down the street to see where it landed. –Quick explainer before we continue: I am referring to Stickball–played by all kids in the New York area from busy city streets to the suburbs–a Spaldeen is a pink rubber ball (usually shared between all the kids on the block), the broom stick is the bat, and a stoop is the porch in front of a building or home.
And what a shot it was. The economy added 165,000 jobs in October against a consensus of 70,000, and the two prior months were revised UP by a combined 84,000, which is the part I want you to underline twice, because revisions have been heading the other way for much of this year. The unemployment rate fell to 4.1% from 4.2%, and it fell for the right reason–421,000 people came off the sidelines and into the labor force (everyone working or actively looking for work), and the economy absorbed them anyway. Average hourly earnings jumped 0.4% in a single month to $38.00, the biggest monthly gain since January. Health care added 42,000 jobs, transportation and warehousing added 25,000, and manufacturing 🤩 added 19,000 and is now up more than 100,000 from its low last December. Even the household survey (the separate poll of families that produces the unemployment rate) showed 463,000 more people working. On the surface, it was the cleanest jobs report we have seen in a long time. Three sewers. Somebody’s mother came out on the stoop.
Wall Street heard the crack of the bat and did the math immediately. Remember, this is a Fed that raised rates in September–its first hike in three years–and then sat on its hands in October. Going into Friday, the odds of another quarter-point hike at the December 8-9 meeting had drifted down into the high 60s, partly because last week’s post-midterm AI selloff had investors wondering how much more tightening this economy could take. The jobs report erased that doubt in about the time it takes to pull an espresso–trust me, I made one. The odds shot into the 80s before settling in the high 70s. It is hard to argue that higher rates are hurting workers when employers just hired at more than three times the average pace of the past year. Good news for workers became bad news for borrowers–and for anything priced on the assumption that money gets cheaper.
But I am still that kid on the stoop, so I walked down to where the ball landed. The first problem is the paycheck. That 0.4% monthly jump was terrific, but year over year, hourly earnings are up just 3.1%, which is actually SLOWER than the 3.2% pace of a month ago. Meanwhile, the most recent read on consumer prices showed inflation running at 3.7%. Do the subtraction and the average worker is falling behind by roughly six-tenths of a point–a raise that does not cover the groceries is not a raise, it is a slower pay cut (economists call this a decline in “real” wages, meaning wages adjusted for inflation). Wall Street saw a hot wage number and worried about inflation. Main Street saw a 3.1% raise against 3.7% inflation and worried about the electric bill. Same report. Only one of them read the whole thing.
The second problem is who is getting the work, and on what terms. The number of people working part-time for economic reasons–the polite government phrase for people who want a full-time job and can’t find one–jumped by 339,000 in a single month, to 4.8 million. Discouraged workers (people who have stopped looking because they don’t believe a job is out there) rose to 448,000 from 414,000. And the long-term unemployed, out of work for six months or more, are holding at 2.0 million, a stubborn 27.6% of everyone without a job. Those are not the numbers of a labor market that is overheating. Those are the numbers of a labor market hiring at the front door while people are still waiting in the hallway, and some of them have stopped knocking. Fair ball? Maybe. But it landed awfully close to the parked cars.
The third problem is that one hitter did most of the work. Professional and business services added 70,000 jobs in October, against an average of about 15,000 a month over the past year. Add health care and roughly two-thirds of the entire gain came from two sectors. Almost everywhere else, the government’s own description was “little change”–construction, retail, information, financial services, and leisure and hospitality, which actually LOST 13,000 jobs. I watch leisure and hospitality closely because it is where the consumer votes with their wallet–restaurants, hotels, a night out–and that consumer is not hiring. And for all the fireworks, the average monthly gain over the past twelve months is still just 48,000. One three-sewer shot does not change a season of bunts and singles.
Which brings us to tomorrow morning at 8:30, when the October CPI/Consumer Price Index hits the tape. And here is the wrinkle almost nobody is talking about. Last October the federal government was shut down, and the people who collect prices for the CPI stayed home–the October 2025 data was never collected, and it never will be. So tomorrow, the government will show us a picture of prices in October 2026 with no official October 2025 to hold it up against. The year-over-year number–the one that leads every newscast, the one your neighbor quotes at the barbecue–may not be there in its usual form. It is a bit like being asked whether you’ve gained weight this year by someone who lost last year’s photo. Economists will build their own estimates, and they will not all agree. In a market this nervous, a missing number is not neutral. It is an invitation for everyone to see…well, what they want to see.
So the monthly numbers carry all the weight, and forecasters are split on the one that matters most, core CPI, which strips out food and energy. Some see core cooling to about 0.2% for the month. Others see it sticking near 0.3%. That one-tenth of a point is the difference between a Fed that hikes in December with a heavy heart and a Fed that hikes and starts talking about January. If core runs hot, Friday’s report becomes the confirmation, December becomes a lock, and the pressure lands right back on the rate-sensitive corners of the market, including the long-duration tech names that just dragged the Nasdaq into a correction. Remember that? 🤮 If core comes in soft, the market will argue the Fed is tightening into a paycheck that is already shrinking in real terms, which is a very different conversation, and one that could put the AI trade and the consumer on the same side of the argument for the first time in months. Either way, there is no free lunch here–there never is on Wall Street. 😉 So before 8:30 tomorrow, ask yourself: which of my holdings only work if rates come down? How much of my portfolio is betting on an AI rebound AND a patient Fed at the same time? And if the answer to both is “a lot,” am I comfortable with that?
Every legendary hit on my block grew a sewer longer each time somebody told the story. By high school, a two-sewer double from the summer before had become a shot that nearly cleared the avenue. Nobody remembered the arguments about the foul lines, and nobody remembered the kid who asked. But I learned something on that street that I have used every single day of my career: the crowd cheers the crack of the bat, but the money is made by the person who walks down the block to see where the ball actually landed. Friday’s report went three sewers, and I suspect that by Thanksgiving, people will remember it as four. Tomorrow at 8:30 AM Wall Street Time, we find out whether it was fair or foul, and I’ll be out on the stoop with my second espresso, still the kid asking the question, still a little annoying about it. Some things never change. Thank goodness. Oh, and one last thing. The kid who runs down the block to check on the ball is also the one who has to deliver the bad news if the Spaldeen rolled into a storm drain by the curb–a thankless job, and I know, because it was usually me. If tomorrow’s core number comes in hot, you’ll know who to blame for the message.
FRIDAY’S MARKETS
Stocks finished a brutal week on a mixed note Friday. Tech found its footing after Thursday’s rout, while the rest of the market digested a jobs report that put a December rate hike squarely back on the table. The Dow fell 237 points to 51,285, the S&P 500 rose 0.3%, the Nasdaq Composite rallied 1.1%, and the Russell 2000 gained 0.9%, so small caps outpaced the large-cap benchmarks again. Bonds took the jobs number the way you’d expect with the 10-year Treasury yield climbing about five basis points to near 4.89%, and the 2-year rising more as traders priced in more tightening. The VIX fell about 9% to 25, though that’s still elevated. WTI crude was little changed near $90.40, and gold slipped about 1%. Even after Friday’s bounce, the Nasdaq lost more than 3% for the week. All the major indexes are still in the green for 2026: the S&P 500 is up 7.8%, the Nasdaq 5.8%, and the Russell 2000 11%.
NEXT UP
No major releases today, but the week ahead will be an adventure with still more important earnings on deck, along with CPI/Consumer Prices Index, PPI/Producer Price Index, and Existing Home Sales. Bond markets are closed for Veterans Day 🫡 but the stock market stays open. Come back often to make sure you don’t miss a single play.
Fed speakers today: Bowman, Goolsbee, and Barkin.
Important earnings today: KKR, EVgo, Somnigroup, Constellation Energy, NRG, Onto Innovation, Ticket Lab, Skydance, Plug Power, Lucid, Occidental Petroleum, Hims & Hers, Take-Two Interactive, USA Rare Earth, and Trump Media.