Weaker-than-expected economic data, highlighted by a July jobs report that dented closely watched recession indicators, sent the stock market tumbling.
In the first two days of August, the S&P 500 (^GSPC) fell 3.2% while the Nasdaq Composite (^IXIC) fell 4.7%. The move extended an earlier drawdown on the Nasdaq, with the index entering a correction after falling more than 10% from its most recent high in mid-July.
“Markets seem to be treating bad news as more bad news, not a positive catalyst given the Fed’s easy outlook,” Citi’s head of U.S. equity strategy, Scott Chronert, wrote in a note to clients on Friday.
“Investors are even starting to ask questions related to the recession and have restarted the slow economic playbook.”
Two weaker-than-expected data prints on Thursday – the lowest US manufacturing activity since November 2023 and the highest weekly jobless claims in about a year – initially led to this week’s sell-off.
Friday’s labor report, which showed the second-weakest monthly job gains since 2020 and the highest unemployment rate in nearly three years, accelerated the move.
The small-cap Russell 2000 (^RUT), which had rallied over the past month as markets grew more optimistic about interest rate cuts, fared worse, falling more than 6.6% over the last two trading sessions.
Defensive sectors like Utilities (XLU) and Consumer Staples (XLP), which usually do better in economic crises, were among the market’s gainers from Wednesday. Utilities rose about 2%, while Consumer Staples gained 1.8% compared to the S&P 500’s decline of more than 3%.
Taken together, these trading actions mark a clear shift in how markets weigh economic data.
Piper Sandler’s chief market strategist Michael Kantrowitz told Yahoo Finance that the slower economic data may have been “good news a year ago when everyone was worried about inflation — not as much today.”
The weak data also fueled a rally in bonds, sending Treasury yields tumbling. The 10-year Treasury yield (^TNX) fell more than 40 basis points last week, hovering near 3.79%, the lowest level since December 2023.
Markets are now pricing in more than four interest rate cuts from the Federal Reserve in 2024, or more than 100 basis points cumulatively, down from less than three cuts seen a week ago, according to Bloomberg data.
And data from the CME FedWatch Tool shows investors are now pricing in a nearly 70% chance the Fed will cut rates by 50 basis points in September, up from just a 6% chance last month.
But for investors, the key remains why The Fed will cut rates.
“When the yield is down, it can still be good to go forward if it comes from lower inflation,” said Kantrowitz. “But (not) if it comes from higher unemployment, bad (manufacturing data), bad earnings, and bad macro data.”
In the previous episode investors priced in Fed rate cuts, stocks rallied, such as late last year.
But this time could be different if the central bank cuts rates due to concerns about a slowing economy.
“The Fed should watch for a scenario where a rise in the unemployment rate leads to a strengthening cycle of income and spending and more job losses,” Oxford Economics US economist Nancy Vanden Houten wrote in a note to clients on Friday.
However, at least for now, that outcome is only one possibility.
“With the benefit of hindsight, it’s easy to say the Fed should cut this week,” JPMorgan’s chief US economist Michael Feroli wrote in a note to clients on Friday. “It’s also easy to say that it will be cut quickly. How quickly and how is the harder question.”
Josh Schafer is a Yahoo Finance reporter. Follow him in X @_joshschafer.
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