Stock market tanks, recession fears rise after weak US jobs report

NEW YORK (August 8) The struggles in the stock market deepened in early trading on Friday after the July jobs report showed more cooling in the labor market, prompting many analysts to say that the Fed’s policy of keeping interest rates higher for longer could push the U.S. economy into a recession. 

“It has certainly been a tricky few weeks since the Dow, S&P and NASDAQ all peaked at record highs in mid-July,” said David Morrison, Senior Market Analyst at Trade Nation. “Since then, there’s been a tech-led correction which hasn’t been slowed down by this quarter’s earnings reports which have been mixed.” 

“Yesterday saw declines of 1.2%, 1.4% and 2.3% for the Dow, S&P 500 and NASDAQ 100 respectively. But these were all topped by a 3% slump in the Russell,” he noted. Thursday’s sell-off “unwound all of Wednesday’s bounce-back, [leaving] some investors worried that there could be more of a pullback to come as we get into the core summer period.”

“At the same time, bond prices have soared, as investors rush for cover and seek out safety in US Treasuries,” Morrison said. “The yield on the 10-year note has fallen below 4% for the first time since February.”

“The suggestion is that the Fed may now be behind the curve when it comes to loosening monetary policy,” he added. “September appears to be the first opportunity for a rate cut. But recent data releases, including yesterday’s ISM Manufacturing PMI and weekly Unemployment Claims, suggest an economy that may be cooling quite rapidly.”

“If that’s the case, then the Fed may be forced to cut more aggressively than they’ve been indicating, not because they’re getting closer to their 2% inflation target, but due to recession fears,” he warned. “With the S&P back below support around 5,400, today’s Non-Farm Payroll release could set the tone as we head into the weekend. Given the change in sentiment, we could see more of a ‘risk-off’ move if payrolls significantly undershoot the 176,000 expected.”

Morrison’s prediction proved prescient as data from the Bureau of Labor Statistics showed the labor market added 114,000 nonfarm payroll jobs in July, significantly undershooting the 176,000 expected by economists. Making matters worse was the unemployment rate, which climbed to 4.3% from 4.1%. 

The signs of a slowdown in the labor market are likely to feed recession fears and rate-cut expectations, and in the short term, have led to investors adopting a risk-off approach. 

At the time of writing, the S&P, Dow, and Nasdaq are all deep in the red, down 2.34%, 1.82%, and 3.19%, respectively. The Nasdaq is now officially in correction territory, down 11.5% from its July 10 high. 

Some of the notable stock declines include a 12.5% decline for Amazon (AMZN) and a 28.2% decline for Intel (INTC) “in a move which looks like pure panic, following news of cost-cutting and redundancies,” Morrison said. 

The chipmaker said it plans to cut jobs and suspend dividends following the shortfall in sales and earnings miss, and the weakness for INTC has negatively affected other chip stocks, including Nvidia (NVDA), which is down 4.2% on the day and 30% from its June 19 high of $134.97. 

“Also of concern is that the much-hyped rotation out of the overvalued, market-leading tech sector and into the overlooked mid and small-cap sector, as represented by the Russell 2000, has come to a screeching halt,” Morrison added. At the time of writing, the Russell 2000 is down 4.07%. 

Traders are currently pricing in three rate cuts this year, starting in September, with many now expecting that the Fed could kick things off with a 50 basis point reduction at the next meeting. 

The yield on the U.S. 10-year Treasury fell further below the 4% level after the labor-market update, bottoming out at 3.793% and trading at 3.824% at the time of writing. 

The one bright spot amid the carnage is Apple (APPL) stock, which is currently up 2.54% after the company beat on earnings despite declining iPhone sales.

According to Charlie Bilello, Chief Market Strategist at Creative Planning, the VIX has spiked to its highest level since March 2023, leading to a surge in fear that is pushing people out of the market – a development he suggested is a contrarian signal to buy. 

“The S&P 500 is down 5.6% from its peak on July 16, the 2nd pullback of the year,” Bilello added. “This is the 29th correction >5% off of a high since the March 2009 low. They all seemed like the end of the world at the time.”

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