Stock Market Today: Slowing Wage Growth Spurs Major Stock Rally

Stocks shot higher Friday as investors cheered the latest jobs report. Although data from the Labor Department showed that hiring remains strong, a lower-than-expected rise in wages suggests that the Federal Reserve's efforts to cool inflation with aggressive interest-rate hikes is working. This was the kind of silver lining that Wall Street has been looking for – and the stock market responded in kind. 

Looking closer at the numbers from the December jobs report shows the U.S. added 223,000 jobs last month. Although this was the smallest gain in two years, it was well above what most economists were expecting. Additionally, the unemployment rate fell to 3.5% from 3.7%. 

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At first glance, December's strong job creation wasn't very encouraging. After all, the Fed is intent on slowing the economy in order to tame fast-rising prices. What gave investors hope, however, were the wage growth figures. Specifically, average hourly earnings – a key measure of inflation tracked by the Fed – rose 0.3% month-over-month and 4.6% year-over-year. Both figures were lower than economists' average estimates, as well as the pace of wage growth seen in the November jobs report. 

"This absolute level is still too high for Chairman Powell, who has remarked that wages are running too hot to be consistent with the Fed's 2% inflation mandate," says Daniel Berkowitz, senior investment officer for Prudent Management Associates (opens in new tab). "With that said, the data is clearly moving in the right direction. All in all, today's jobs numbers offered a Goldilocks scenario, not too hot, not too cold – and on the heels of a 'just right' report, stocks are rallying."

Indeed, the Dow Jones Industrial Average jumped 2.1% to 33,630, the S&P 500 gained 2.3% to 3,895, and the Nasdaq Composite added 2.6% to 10,569. 

Top Inflation Hedges

Today's wage growth data provided another encouraging read on inflation. But the really big update will come next Thursday morning with the release of the December consumer price index (CPI).  

The past two CPI reports showed that consumer price growth moderated in October and November, and expectations are for it to have slowed further in December. That said, inflation remains high – and well above the Fed's target. Douglas Porter, chief economist at BMO Capital Markets, continues "to believe that underlying inflation will remain stickier than expected, even with this week's admittedly encouraging developments on a number of fronts." 

With this in mind, investors would do well to continue including inflation hedges in their portfolios. As we've mentioned several times in this space, these hedges against rising prices can include healthcare and consumer staples stocks, which provide goods and services that people tend to buy no matter what. The best inflation-beating stocks are also certainly worth a closer look.