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Stocks sank Friday in response to good news about the economy, a development that will take some explaining.

A government report Friday morning showed U.S. employers added a whopping 256,000 jobs in December. The unemployment rate fell to 4.1%.

But the stock market responded with trepidation. The Dow Jones Industrial Average ended the day down 697 points, or 1.6%. The S&P 500 was down 1.5%. The Nasdaq was down 1.6%. Friday's results leave all three indexes in negative territory for 2025.

The reason: A booming economy feeds fears that the Federal Reserve could reverse course on lowering interest rates. A popular FedWatch forecast shows near-certainty that the Fed will leave interest rates untouched at the panel's January meeting. Many traders don't think regulators will order another rate cut until summer. The Fed typically lowers interest rates to stimulate the economy and raises them to slow it.

A strong jobs report is bad news for stocks

The strong jobs report "will be good news for the U.S. economy and the US dollar, unwelcome news for equities," meaning stocks, said Seema Shah, chief global strategist at Principal Asset Management.

Other observers concurred.

"Investors may want to brace themselves for more volatility as the market recalibrates expectations for fewer cuts," said Gina Bolvin, President of Bolvin Wealth Management Group in Boston.

Another report on Friday hinted at fresh inflation fears. Consumers expect 3.3% inflation in the year ahead, according to the University of Michigan's Survey of Consumers . That metric is up from 2.8% a month ago.

It was a down day for the bond market, too. The yields on long-term bonds have been rising, with the 10-year Treasury bond now offering an interest rate of nearly 4.8% . A higher bond yield means a declining bond market : Bond prices fall as yields rise.

The day looks better for bitcoin traders. The cryptocurrency was up about 3%, according to CoinDesk, though still well below the $100,000 mark.

(This story has been updated with new information.)

This article originally appeared on USA TODAY: Dow drops nearly 700 points after good economic news. Let us explain.