The Latest Jobs Report All But Eliminated the Chance of a Rate Cut This Summer. Here's What That Means for the Market.

Not that last week's inflation report didn't confirm it, but the odds of an interest rate cut anytime soon were already waning a week earlier. That's when we got May's surprisingly healthy employment numbers. The United States added 172,000 jobs last month, topping expectations of only 80,000 against a backdrop of a large number of AI-related layoffs.

^SPX data by YCharts

Perhaps the economy isn't under as much pressure as feared.

And this leaves investors in a quandary. Much of the recent bullishness has been rooted in the assumption that interest rates would soon be falling as a means of spurring economic activity. Not only does the employment picture suggests the economy's doing fine, but lingering -- and even accelerating -- inflation make interest rate cuts dangerous. Indeed, the prospect of rising interest rates is on the horizon.

Now what?

Interest rate expectations just shifted direction

It wasn't just May's job growth figures that were surprisingly solid, by the way. April's figure was revised upward from 115,000 to 179,000, while March's new payroll number was revised to a two-year high of 214,000. As a result, the nation's unemployment rate remains relatively low at 4.3%.

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The impact on predictions of future interest rates was clear as well. Although last week's inflation figures sealed the deal, future-based bets that the federal funds rate would start falling in late 2026 began unwinding following the release of May's payroll report. Unofficial expectations that it would start happening even sooner than that, of course, are completely gone. In fact, numbers from interest rate futures exchange CME indicate the market is actually betting on a rate hike sometime in Q4 of this year.

It's not the news investors want to hear.

Just relax. This fervent discussion is making more out of the matter than it arguably needs to.

Just know what you can't know

Don't misunderstand. In the short run, inflation, interest rates, jobs, and earnings can and do wreak havoc on the market. As Benjamin Graham explains, "in the short run, the market is a voting machine," meaning that stocks reflect investors' emotionally charged responses. To this end, last month's jobs report and the increased likelihood of "higher-for-longer" interest rates generally work against the market.

Now add the rest of the well-circulated quote. Graham adds, "but in the long run, it is a weighing machine," meaning stocks eventually reflect the fundamental values of their underlying companies.

To this end, as the graphic below shows, over the past 30 years there's actually been very little discernible correlation between interest rate levels -- as measured by the Fed Funds Rate -- and the S&P 500 (SNPINDEX: ^GSPC).

^SPX data by YCharts

What gives? Simply put, there's always more to the story. For example, in 2006 and there were no mortgage rates high enough to cool the real estate meltup underway at the time, just as there were no interest rates low enough to shake stocks out of the slump following the dot-com crash of 2000.

Since you can't consistently predict any of these factors, your best course of action is doing what's always been smart in any environment. That's buying and holding quality stocks for the long haul, knowing patience will pay off in the end.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.