Bullish investors got a sour start to the long weekend, as stocks sold off indiscriminately on Friday after a mixed jobs report that traders believe makes it more likely the Fed will raise rates later this month. The market has bounced wildly over the past three weeks, mostly because of fluctuations in Chinese economic data and stocks. But Friday’s fall was entirely homegrown, given that the Chinese market was closed for a holiday.

“It was an emotional reaction to the jobs report and the Fed,” says Ryan Larson, head of equity trading at RBC Global Asset Management. “There’s not much behind it beside emotion. It should really be seen as a good thing when the Fed thinks the economy is strong enough on its own.”

The U.S. added 173,000 jobs in August, well below expectations for 217,000. But previous months were revised higher by 44,000, and other data also reinforced a healthy labor market—wages are up 2.2% year over year and corporations are replacing part-time workers with full-timers, a good sign for the economy.

“Full-time jobs surged 435,000, which is incredible—in fact, the big story here is that in the past two months, amid a sea of global turbulence, corporate America had enough confidence in the domestic economic outlook to boost full-time employment by a cool one million, as 750,000 part-time positions were replaced,” writes David Rosenberg at Gluskin Sheff.

Of course, every good sign for the economy comes with a caveat: Traders are convinced the Fed is now more likely to raise interest rates this year. Futures markets now predict about a 30% chance of an interest hike this month, and a nearly 60% chance in December.

The Dow Jones Industrial Average fell 541 points, or 3.2%, on the week, to 16,102.38. The Standard & Poor’s 500 index dropped 68 points to 1921.22. The S&P, which has fallen for two of the past three weeks, is down 9.8% from its closing high in May. The Nasdaq Composite fell 144 points, or 3%, to 4683.92.

All of the S&P 500 sectors fell at least 2% on the week, although utilities, health care, and financial stocks were particularly weak. Energy stocks gave up more ground as oil prices fluctuated, with Nymex crude falling nearly 8% on Tuesday before recovering to end the week up 1.8% at $46.05 a barrel.

The volatility is clearly spooking some investors—retail investors have reduced equity allocations by 2.4 percentage points in August to 65%, according to the American Association of Individual Investors. That’s the lowest percentage allocated to equities in 10 months. Maybe they heard that the market tends to fall in September; it’s the only month of the year where the average performance of the Dow is negative over the last 100, 50, and 20 years, according to Bespoke Investment Group.

China has caused much of that anxiety, as investors fear the stock selloff and economic slowdown could be contagious. Earlier in the week, U.S. stocks dropped on data showing Chinese manufacturing had fallen to a three-year low. The data throw into doubt China’s projections that its economy will grow 7% this year.

Stock market volatility is likely to continue until the Fed meeting on Sept. 16-17. Vacationing traders may also keep one eye on Chinese markets on Monday to see how they open following the two-day holiday there.

(Source: Barrons Online)