Stock markets don’t always reflect the state of the economy

This report is from today’s CNBC Daily Open, our international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. Like what you see? You can subscribe here.

Mixed jobs report
The U.S. economy added 142,000 nonfarm jobs in August. That’s fewer than the 161,000 expected by Dow Jones, but better than July’s revised 89,000. Unemployment in August ticked down to 4.2% from 4.3% as the labor force grew 120,000 for the month.

Slumping stocks
U.S. markets fell Friday, with the Nasdaq Composite sliding 2.55% to end the week more than 10% off its record close. Asia-Pacific stocks continued the slide on Monday. Japan’s Nikkei 225 dropped around 0.7% as data showed the country’s second-quarter GDP rose 2.9% on an annualized basis, lower than the Reuters poll of 3.2%.

Stagnating prices in China
Prices in China rose just 0.6% year on year in August. A Reuters poll was expecting a 0.7% increase for the year. Meanwhile, China’s producer price index dropped 1.8% year over year, more than expected. To combat deflationary pressures, China needs “proactive fiscal policy and accommodative monetary policy,” said Yi Gang, former head of the PBOC.

Risk of carry trade unwinding
The Japanese yen is maintaining its strength against the U.S. dollar, and might edge even higher because of declining U.S. yields, Kathy Lien, managing director of forex strategy at BK Asset Management, told CNBC. That might cause the yen carry trade – in which investors borrow in yen to invest in higher-yielding assets – to unwind further.

[PRO] JPMorgan downgrades China stocks
Faced with deflationary pressures, a housing market crash that has yet to recover and sluggish consumer demand, China’s economy and stock market have been struggling in recent times. It’s not surprising, then, that JPMorgan downgraded its opinion on Chinese stocks – but the bank still likes specific China stocks.

What do markets know that we don’t?

On Friday, the S&P 500 declined 1.73%, the Dow Jones Industrial Average lost 1.01% and the Nasdaq Composite sank 2.55%, capping off a losing week for all major U.S. indexes.

Big Tech stocks were among the worst performers. The names behind much of this year’s rally — Nvidia, Alphabet, Amazon — fell around 4% on Friday alone.

If the movement of markets is a barometer for the health of the economy, then we’re in for some bad times ahead.

That’s, however, a very big “if.” Markets are less an Excel formula than Word’s often random autocomplete suggestions.

What we do know from hard numbers is that the U.S. economy, while not doing too great, isn’t nearly as bad as stocks imply.   

Job additions in August were substantially higher than in July, while the unemployment rate dipped for the month. Yes, the headline number’s lower than expected. But it breaks a downward-moving trend from May, suggesting the U.S. job market isn’t moving in the wrong direction.

Sure, the jobs report looks to the past while markets forecast the future. But the futures market itself is betting on a 71% chance for a 25-point cut in September, and only 29% for 50 points, according to the CME FedWatch tool.

That implies things in the economy aren’t so bad that the Fed will be forced to make a drastic cut. Adding to that, there hasn’t been any concrete news or earnings reports that have affected the fundamentals of Big Tech.

Further, Goldman Sachs and the Atlanta Federal Reserve recently revised their projection of third-quarter GDP upwards.

The stock market’s downbeat week, then, seems “a sentiment-driven move that’s largely driven by growth concerns,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.

Sometimes sentiment tells us things our gut knows but our brain doesn’t. Other times, we need to tell ourselves sense and sensibility are often at odds with sentiment.

– CNBC’s Jeff Cox, Sam Meredith, Samantha Subin, Pia Singh contributed to this story.