US stocks tumbled across the board on Friday after the July jobs report showed a further cooling in the labor market, fueling concerns the Federal Reserve’s “higher for longer” interest-rate stance might end in recession and that the central bank may have waited too long to start lowering rates.
The Nasdaq Composite (^IXIC) dropped 2.6% after the jobs report’s release. That plunged the tech-heavy index into correction territory, defined as a more than 10% drop from its recent high on July 10.
The Dow Jones Industrial Average (^DJI) slumped 1.5%, or more than 600 points. The S&P 500 (^GSPC) sank 1.8%.
All three major indexes recorded weekly losses. The S&P and the Dow fell 2%, while the Nasdaq shed 3%. The Russell 2000 (RUT) fared even worse, posting a weekly loss of about 6.8%.
On Friday, new data showed the US economy added fewer jobs than expected in July, while the unemployment rate unexpectedly rose to 4.3%, the Bureau of Labor Statistics’ nonfarm payrolls report showed. Those additional signs of a slowdown in the labor market are likely to feed recession fears and rate-cut expectations.
Traders are now pricing in three rate cuts this year — in September, November, and December — and bets are on a 50 basis-point reduction in September. The yield on the benchmark 10-year Treasury (^TNX) dropped further below the 4% level after the labor-market update, trading around 3.79%.
News on individual stocks was just as downbeat as the economic data. Chipmaker Intel’s (INTC) bruising earnings report added to the pressure on stocks amid questions about the payoff of AI investments for Big Tech.
The chipmaker said it will slash jobs and suspend dividends after its sales forecast fell short and it missed on earnings. Intel shares sank over 26%, dragging on other chip stocks.
Meanwhile, Amazon stock slid almost 9% on the heels of sales guidance that undershot Wall Street estimates. Apple (AAPL) shares were a relative winner, up less than 1% after the company beat on earnings even as it reported a slide in iPhone sales.
Stocks kicked off August trading on Thursday with a sell-off after a clutch of data on showed cracks emerging in the US economy, wiping out gains spurred by expectations for a September interest-rate cut.
This left Wall Street wondering whether the economic slowdown shown in recent data means the Federal Reserve has kept interest rates at historic highs for too long, risking an economic downturn.
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A look at the week ahead
Investors will greet the first full week of August following a volatile series of sessions, a disappointing July jobs report, and heightened chatter over the size of the Fed’s widely expected September rate cut.
The tech giants posted mixed results in recent days. And the market will be looking to see whether the sector rebounds from correction territory, as the tech-heavy Nasdaq Composite (^IXIC) has fallen more than 10% below its recent high in early July.
Meanwhile, a fresh slate of major names is on deck to report next week, continuing an earnings season playing out against a presidential election and fresh economic data that has rekindled discussion of a potential recession.
Disney (DIS), Uber (UBER), Eli Lilly (LLY), and Novo Nordisk (NVO) are scheduled to report in the coming days.
Here’s a look at the earnings calendar for next week:
Anticipated earnings releases for the week of August 5, 2024. (Earnings Whispers) -
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A Magnificent 7 meltdown
Apple was the only Big Tech company that gained. Much of the tech world was in the red on Friday. Apple (AAPL) stood alone on Friday, a speck of green in a sea of red, as shares of every other Magnificent Seven company were sliding along with most of the market.
The iPhone maker rose 2% Friday compared to heavy losses from everyone else. After the bell on Thursday Apple beating analysts’ expectations on the top and bottom lines despite a year-over-year decline in iPhone sales.
Meanwhile, Amazon led the losses, losing 11% after the company shared a current quarter forecast on Thursday that fell short of expectations on both the top and bottom lines.
The harsh reaction was magnified on Friday after the July jobs report showed the US economy added fewer jobs than expected while the unemployment rate unexpectedly rose to its highest level in nearly three years.
The sell-off was pronounced in the tech world. Microsoft (MSFT) lost 2.6%; Alphabet (GOOG, GOOGL) shed 2.5%; Nvidia (NVDA) gave up 1.3%; Meta (META) slipped 1.5%; and Tesla (TSLA) fell 2.9%.
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The new baseline for 2024 — 100 basis points
Five months ago, Wall Street economists were aggressively revising expectations for rate cuts in 2024, as some believed a series of strong inflation readings in the winter would lead the Fed to hold rates steady throughout the year.
Now, that calculus has changed dramatically.
Softer inflation in the spring brought the prospect of a rate cut in September or December into focus, and the last month of data has made clear that rate cuts are coming this fall.
Now, the conversation is about the magnitude of September’s rate cut — 25 or 50 basis points? — and what the rest of the year has in store rather than “will they or won’t they.”
They will.
And one of the leading voices on the Street when it comes to what the Fed ought to do next is Neil Dutta, an economist at Renaissance Macro, who wrote in an email on Friday that a new “reasonable baseline” for Fed cuts this year is 100-125 basis points.
Indeed, data from the CME Group on Friday showed investors pricing in a 60% chance of a 50-basis-point cut next month, which already gets you halfway there.
Take the rate cut conversation alongside Friday’s stock market action, which saw the Nasdaq enter a correction and investors take a squarely risk-off pose, and it seems the environment has become quite charged in just a few weeks.
But while the Fed perhaps missed a window on Wednesday to be aggressive in cutting rates, this need not constitute a gross policy failure.
“The Fed stepped on a nail,” Dutta wrote. “Thankfully, they have not stepped on a bed of nails.”
“What we are dealing with now is the result of monetary policy being too tight. This means the solution is quite simple. Move policy to a less restrictive stance. If that does not work, keep doing more until the ship course corrects.”
When the stock market is making a big whooshing sound and the Sahm Rule is being triggered, things can feel quite perilous. But an economic slowdown is what the Fed had hoped to engineer all along. Now, it has arrived.
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