A series of weaker-than-expected economic data, highlighted by a July jobs report that sparked a closely watched recession, sent the stock market lower.
In the first two days of August, the S&P 500 (^GSPC) fell 3.2% while the Nasdaq Composite (^IXIC) fell 4.7%. The moves extended past gains on the Nasdaq, and the index entered a correction after falling more than 10% since its mid-July high.
“Markets appear to be treating bad news as bad news, not the positive stimulus provided by the Fed’s dovish outlook,” Citi’s head of US equity strategy, Scott Chronert, wrote in a note to clients on Friday.
“Investors are starting to ask questions about the recession and they’re starting to check their recession books.”
Two weaker-than-expected data sheets on Thursday – the slowest US manufacturing activity since November 2023 and the highest weekly unemployment report ever read almost a year – they went on sale this week.
Friday’s jobs report, which showed the second slowest monthly increase since 2020 and the highest unemployment rate in nearly three years, hastened the move.
The Russell 2000 (^RUT), which had rallied last month as markets rallied on hopes of a rate cut, has suffered further losses, falling more than 6.6% over the past two trading sessions. .
Defensive sectors like Utilities (XLU) and Consumer Staples (XLP), which tend to outperform recessions, are among the market’s biggest gainers since Wednesday. Utilities rose about 2%, while Consumer Staples gained 1.8% compared to the S&P 500’s more than 3% decline.
Taken together, this business activity marks a clear shift in how markets balance economic factors.
Piper Sandler’s chief market strategist, Michael Kantrowitz, told Yahoo Finance that the slow economic data may have been “good news last year when everyone was worried about inflation – when it is the same today.”
The weak data also led to a rally in bonds, which sent Treasury yields lower. The 10-year Treasury yield (^TNX) fell more than 40 basis points last week, to close at 3.79%, its lowest level since December 2023.
Markets are now pricing in more than four rate cuts from the Federal Reserve in 2024, or more than 100 basis points overall, up from less than three cuts last week, according to Bloomberg data.
And data from the CME FedWatch Tool shows that investors are now pricing in about a 70% chance that the Fed will cut rates by 50 basis points in September, up from a 6% chance last month.
However, for investors, the key is still there why The Fed would cut rates.
“When products go down, it can still be a good thing going forward if it comes from a low price,” Kantrowitz said. “But [not] if it comes from high unemployment, bad [manufacturing data]bad earnings, and bad macro facts.”
In previous quarters where investors had bought more Fed rates, stocks rose, as at the end of last year.
But this time it could be different if the central bank cuts rates because it is worried about the economic slowdown.
“The Fed needs to guard against a situation where a rise in the unemployment rate creates a vicious cycle of reduced wages and spending and further job losses,” a leading US economist at Oxford Economics Nancy Vanden Houten wrote in a letter to clients on Friday.
However, at least for now, that outcome remains one of many possibilities.
“In hindsight, it’s easy to say the Fed should have cut this week,” JPMorgan’s chief U.S. economist Michael Feroli wrote in a note to clients on Friday. “It’s also easy to say that they will cut soon. How soon and how hard are the tough questions.”
Josh Schafer is a reporter for Yahoo Finance. Follow him to X @_joshschafer.
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