The cooling but still strong labor market, as evidenced by the latest government data, doesn’t equate to an impending recession. On the contrary, a moderation in jobs growth paves the way for an interest rate cut next week from the Federal Reserve, which would in turn stimulate the economy and financial markets.

The nonfarm payrolls report for August, released last Friday by the U.S. Bureau of Labor Statistics (BLS), was mixed. Negative news was interspersed with silver linings. Nothing to get too worried about. But you wouldn’t know it from the way some commentators clutched their pearls.

Indicative was Dan North of Allianz Trade, who opined on CNBC: “I don’t like this a whole lot…it’s below expectations on the headline, and what really bothers me is the revisions…This is certainly going the wrong way.” Others in the financial media echoed his pessimism.

So what caused this fit of the vapors? While the unemployment rate ticked lower, it was overshadowed by disappointing job growth and some downward revisions by the BLS to previous figures.

The U.S. economy added 142,000 jobs in August, below the consensus forecast of 161,000 but up from July’s underwhelming 89,000 new jobs. The past two month’s figures were revised lower by 86,000, bringing the three-month average job gains to a more subdued 116,000.

The manufacturing sector was particularly weak, losing 24,000 jobs, versus expectations of losing 2,000. This comes in the wake of recent ISM Manufacturing data signaling that the U.S. manufacturing sector remained in contraction in August.

With a softer labor market in the spotlight, the markets last week extended their seasonal September slump, dragging the S&P 500 down 4.2% from its recent highs. Yet, even with this dip, the index remains up 13.4% for the year.

The nervous Nellies also seem to lose sight of the fact that the U.S. unemployment rate in August edged lower from 4.3% to 4.2%, well below the long-term average of 5.7%.

Slower Jobs Growth Equals Faster Fed Action

What’s more, real U.S. gross domestic product (GDP) increased at an upwardly revised annual rate of 3.0% in the second quarter of 2024, according to the latest data from the U.S. Bureau of Economic Analysis (BEA). The International Monetary Fund forecasts that U.S. GDP will come in at 2.6% for full-year 2024.

The U.S. currently enjoys the strongest economy among all developed countries. However, during this election season, some political partisans are portraying America as a dystopian hellhole of high unemployment, rampaging inflation, and surging crime. The empirical reality is that inflation is rapidly falling, unemployment is at its lowest level since 1969, and violent crime hovers at a 50-year low.

Combine the sanguine GDP data with currently strong corporate earnings growth and you realize that underlying conditions for stock market gains remain favorable.

Monetary easing will provide a shot of adrenaline for the markets. The debate isn’t if the Fed will cut rates at its September 18 meeting, but by how much. A 0.25% cut is the baseline, but a half-point reduction isn’t out of the question.

The Autumn Chill

The S&P 500 gained a robust 18% through August. But now we’re in the midst of the seasonally rough patch of September-October. As the following chart shows, investor anxiety is on the rise and stocks took a beating last week:

Throw in a U.S. election just around the corner, and we could be in for a pullback, perhaps even a correction. But don’t panic. Fundamentals such as falling inflation, impending rate cuts, and steady economic growth should shore up the bull market.

For long-term investors, this might be the perfect time to embrace market dips, rebalance portfolios, and add quality investments while prices are (potentially) on sale. Economic growth is likely to kick into higher gear within the next 12-18 months.

That said, a defensive mood is spreading across asset classes, with traditionally safe sectors such as consumer staples and utilities leading the charge.

Treasury yields have dipped, and the once-upside-down yield curve has flipped back to positive territory, signaling softer labor data and the likelihood of Fed rate cuts.

Meanwhile, crude oil prices are slipping, with the U.S. benchmark West Texas Intermediate (WTI) falling below $70 per barrel, reflecting global demand fears, especially from China’s sluggish economy.

Caution may be the flavor of the month, but investors have survived similar growth scares in the past. With sentiment cooling off from overly bullish highs, even mildly positive economic news should spark a market rebound.

With rate cuts almost a certainty, the central bank seems ready to provide support, especially with labor market jitters. At the Jackson Hole symposium in August, Fed Chair Jerome Powell intimated as much, stating, “We do not seek or welcome further cooling in labor market conditions.” Given August’s soft labor data, expect the Fed to act swiftly.

I’m expecting a 0.25% rate cut at the September 18 meeting, bringing the Fed funds rate to 5.0% to 5.25%. However, I wouldn’t be surprised if Powell hints at future rate reductions during his post-meeting press conference.

The Week Ahead…

This week’s consumer price index (CPI) and producer price index (PPI) readings will dominate the news, with inflation expected to continue its downward trend. With both inflation and interest rates dropping, consumer and corporate spending should soon pick up steam.

The following economic reports are scheduled for release in the coming days:

NFIB optimism index (Tuesday); CPI (Wednesday); initial jobless claims, PPI (Thursday); consumer sentiment (Friday).

Volatility is likely to be a mainstay in the coming weeks, but the Fed appears to be pulling off a soft landing for the economy. Consider market drops as opportunities to buy the stocks on your “wish list” at better prices.

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John Persinos is the editorial director of Investing Daily.

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This article previously appeared on Investing Daily.