This week, we got another example of an enduring paradox on Wall Street: how “bad” news is often perceived as “good” news.

To the average individual, news of increasing joblessness provokes concern and anxiety. It suggests economic instability, personal hardship, and a downturn in consumer spending. Yet, on Wall Street, this seemingly bleak development can trigger optimism and market rallies.

The fact is, economic indicators are not assessed in isolation but in comparison to market expectations.

Case in point: The latest report on U.S. weekly jobless claims, released Thursday, came in at a peppy 231,000, their highest level since August 2023. The unemployment rate climbed from 3.8% to 3.9%.

This data suggests a labor market that’s catching its breath after a long sprint (see chart).

Source: U.S. Department of Labor

This sudden uptick suggests emerging softness in the U.S. labor market, but it also gives the Federal Reserve justification to take a more dovish stance on monetary policy. This surplus of labor creates downward pressure on wages as workers compete for fewer positions, ultimately curbing inflation because it dampens overall wage growth across the economy.

That said, jobs growth remains healthy enough to sustain the stock market rally. While challenges persist, including ongoing supply chain disruptions, the fundamentals are sound. The moderation in jobs growth acts as a stabilizing force, tempering inflationary pressures while preserving the conditions for continued economic expansion.

The U.S. economy remains robust, buoyed by strong consumer spending, business investment, and continued fiscal support.

While changing employment dynamics can inject volatility into certain sectors, it also fosters investment opportunities. This shift in employment dynamics should drive sector rotation within the equity market.

For instance, sectors heavily reliant on consumer spending, such as retail and leisure, are likely to experience increased volatility as unemployment rises. Conversely, I expect sectors linked to essential goods and services, such as health care and utilities, to demonstrate more resilience.

As employment numbers cool off, Treasury yields are starting to head south across the curve, with the 30-year U.S. Treasury yield falling. That’s a favorable development as well.

Looking ahead, we’ve got inflation stepping into the spotlight next week with the consumer price index (CPI) for April, slated for release on Wednesday, May 15. After the CPI’s earlier surprise performances this year, the oddsmakers are betting that both headline and core CPI inflation will show evidence of cooling off a bit in April.

The forecast is for core inflation, excluding food and energy, to take a breather with a modest 0.3% increase, a welcome change from three straight months of 0.4% jumps. On an annual basis, core CPI is expected to shimmy down to 3.6% from 3.8%, while headline CPI is slated to dip to 3.4% from 3.5%.

The Fed will need a few encouraging inflation readings before it feels comfortable enough for a rate cut. Expectations are high (well, maybe not that high) that we’ll hit that sweet spot by the end of the year. Until then, Wall Street will be on edge.

Keep in mind, the appeal of returning economic equilibrium extends beyond domestic borders. Stable economic conditions in major economies such as the United States exert positive ripple effects worldwide.

International markets have been rebounding, especially as economic news from China becomes more favorable. Most investors tend to be underweight international equities and would benefit from evaluating the domestic and international mix in their portfolios.

The main U.S. stock market indices closed mixed Friday as follows:

• DJIA: +0.32%
• S&P 500: +0.16%
• NASDAQ: -0.03%
• Russell 2000: -0.67%

Read This Story: Time to Rethink Commodity Cycles

Under current conditions, I particularly like health care stocks right now. The demand for medical services and pharmaceutical products tends to be relatively stable, driven more by demographic trends and health needs than by economic cycles and the whims of the U.S. central bank.

Utilities represent another sector poised for relative stability and growth this year. These companies provide essential services such as electricity, water, and gas, which are necessary regardless of economic conditions.

Consequently, utilities often exhibit defensive characteristics, offering investors a potential hedge against broader market volatility. Utilities typically generate steady cash flows and offer attractive dividend yields, making them appealing to investors seeking income stability.

You should also consider cryptocurrency, an asset class that’s increasingly part of the investment mainstream. Crypto is making ordinary investors rich and it also serves as an inflation hedge. But you need to make your move now, before the next leg-up in the crypto bull market of 2024.

Our in-house crypto expert, Alex Benfield, will walk you through everything you need to know about crypto, step by step. To learn more about Alex’s new trading service, Crypto Trend Investor, click here.

John Persinos is the editorial director of Investing Daily.

To subscribe to John’s video channel, click this icon: