News Friday of slowing employment growth calmed strategists who had been skeptical about a slowdown in the U.S. economy - and it even fueled talk that Federal Reserve policymakers might reverse course and cut interest rates soon.
Charles H. Blood, director of financial market strategies at Brown Brothers, Harriman & Co, boosted his outlook for financial stocks and bonds to "moderately bullish," from "neutral," on Friday after the Labor Department reported that unemployment rose to 4.1% in August, from 4.0%, and the economy shed 105,000 jobs.
"This is the first time that we have been bullish on financial assets in a year," he wrote. "I feel much more confident" than in early August when concern abounded "that consumption and economic growth might rebound from the spring slowdown."
Now it "appears that the Federal Reserve has indeed succeeded in inducing slower growth without precipitating either an equity bear market or a recession," he wrote. The slowdown is not enough to justify an immediate rate cut, Mr. Blood said. But he predicted that later this year or early next year rates will come down and that this would stimulate financial stocks' prices.
In trading Friday, bank stocks slipped after their strong rally Thursday. The American Banker index of 225 banks fell 0.98%, and its index of the 50 largest banks fell 1.07%.
Kevin Caron, associate strategist at Gruntal & Co., said consumer spending is returning to a "normal type of growth" but business investment is accelerating, indicating that gains in productivity will keep the economy from slipping into recession. "There will be more growth in investment in the year ahead," he said, "and after an 11-year expansion this is good news," good enough, apparently, to make room for lower interest rates.
"There is little need for stimulation" right now, he said, but after a series of six hikes in the federal funds target rate since last summer, the Fed is in a good position to reduce rates if needed.
Other economists, however, were not so sure the Fed is done raising rates. Sung Won Sohn, chief economist at Wells Fargo & Co., said the central bank "can extend its vacation well into the fall season," but he added that he sees no indication of a rate cut in the offing. "We haven't seen inflation despite robust economic growth," he agreed, but the economy could accelerate in coming months, which might lead to rate increases early next year.
That is also the outlook at J.P. Morgan & Co. "It is premature to talk about easing" monetary policy, said James O'Sullivan, who covers the U.S. economy for the banking company. "More likely, the rebound in stocks and the drop in market rates give growth a fresh boost. Meanwhile, core inflation and labor costs are already moving up."
Also, concerns about credit-related problems for banks could increase in a slow-growth scenario.
Harriman's Mr. Blood acknowledged that the more the economy slows, the bigger the risk of loan defaults, but he said asset-quality concerns would not have much impact on stock performance, at least not for the sector as a whole. Though some banking companies might see their shares suffer, financial stocks in general will move up as interest rates go down, he said.
And Mr. Sohn said that though asset quality is his "biggest concern," but the market might be willing to overlook it until loan defaults mount. "The stock market is not a good gauge for what is happening" inside banks, he said.