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Aug jobs report highlights reason for recent stock drops: Paulsen

What's being perceived as a rather strong government employment report for August may usher in a sea-change on Wall Street that could pressure stocks even further, closely followed market watcher Jim Paulsen said Friday.

The chief investment strategist at Wells Capital Management told CNBC's "Squawk Box" that he does not see a bear market, but expects the S&P 500 may break below the 1,800 level, which would represent a 7.7 percent decline from Thursday's close.

"Wall Street is somewhere today it's never been in this recovery and so is the economy. We're at a crossroads," said Paulsen. "If you have to raise interest rates you challenge the whole valuation profile of both the stock and bond markets." This realization has been the underlying problem with the markets over the past couple of weeks, he said.

The government's August employment report, released Friday morning, showed nonfarm job growth of 173,000, a number lower than expectations of 200,000. The jobless rate was rosier than forecast, however, falling to 5.1 percent—the lowest since April 2008. Average hourly wages rose a great-than-expected 0.3 percent. The July payrolls were revised higher to 245,000.

"This market was driven basically by being able to grow the economy up until now with no negative consequences," Paulsen said. He no longer thinks that's the case, with the economy approaching full employment: "We're going to see some wage and price pressures."

In the moments after the jobs report, Moody's Analytics Chief Economist Mark Zandi said the nonfarm payrolls number, which is usually what Wall Street focuses on, was skewed by a seasonably statistical fluke that in recent years has frequently led to sharp upward revisions to payroll figures for August after initial weak readings.

By all accounts, the labor market remains strong, said Zandi, who helps compile the ADP private sector payrolls report, which was released Wednesday. U.S. private sector companies, according to ADP, created 190,000 jobs last month—a number better than July's downward revised 177,000 but below August expectations of 201,000 new positions.

Kevin Hassett, former Fed economist and ex-GOP campaign advisor, told CNBC that he's confident the jobs report was strong enough to push the Fed to raise rates at its meeting later this month.

But Hassett of the right-leaning American Enterprise Institute said the Fed has a tough road ahead with global growth slowing because of China's economy, which he sees as much worse off than people believe.

Meanwhile, Neera Tanden, who formerly served in the Obama and Clinton administrations, said she's still concerned about the labor market, despite the encouraging unemployment rate decline.

Tanden, president for the left-leaning Center for American Progress, was concerned about the payrolls number, and what she sees at the economic inequality that still exists in America.

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