Stock market today: Nasdaq, S&P 500 see worst week of the year in volatile start to September
09/07/2024 03:21
The pivotal August jobs report will provide clues to the size of the Fed's rate cut this month and the health of the economy.
US stocks closed in a sea of red on Friday to cap off a volatile trading week as investors digested a crucial jobs report that provided clues to the size of this month's expected interest rate cut.
Tech stocks were the biggest laggard with the Nasdaq Composite (^IXIC) plunging more than 2.5%. The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) dropped around 1.7% and 1%, respectively.
It was the worst week for the Nasdaq since June of 2022 while the S&P experienced its worst week since March of 2023.
The US economy added 142,000 jobs in August, which trailed expectations for about 165,000 jobs added. Prior month job growth was also revised lower, as the labor market showed signs of continued cooling. The unemployment rate, however, ticked back down to 4.2%.
The report shifted expectations for the Fed to enact a more sizable rate cut at its meeting in less than two weeks. According to the CME FedWatch tool, traders see a 50-50 chance of a 50 basis point cut, which was up significantly from Thursday.
On Friday, Fed Governor Chris Waller reiterated recent phrasing from Fed Chair Jerome Powell that "the time has come" to lower interest rates.
"If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings," Waller said in prepared remarks delivered at the University of Notre Dame.
Read more: Fed predictions for 2024: What experts say about the possibility of a rate cut
Meanwhile, in corporate news, chipmaker Broadcom's (AVGO) shares fell more than 10% on the heels of a lackluster sales forecast. While the Apple supplier is benefiting from a surge in AI spending, its other divisions are falling short.
That dragged down other chip stocks, with shares of AI heavyweight Nvidia (NVDA) falling about 4%.
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S&P 500, Nasdaq cap off worst week of 2024
US stocks capped off a volatile trading week on Friday with the S&P 500 and Nasdaq seeing their worst week of the year.
Tech stocks were the biggest laggard of the trading session with the Nasdaq Composite (^IXIC) plunging more than 2.5%. The S&P 500 (^GSPC) and Dow Jones Industrial Average (^DJI) dropped around 1.7% and 1%, respectively.
It was the worst week for the Nasdaq since June of 2022 while the S&P faced its worst week since March of 2023.
'Uninspiring' earnings expectations
Analysts slashed their earnings expectations for the current quarter by 2.8% during July and August, per FactSet senior earnings analyst John Butters. As Butters pointed out in a note on Friday afternoon, analysts typically cut their earnings estimates as the quarter goes on. And the current level of cuts falls between the low and high end of the averages seen over the last 20 years.
But still, it marks a shift in market sentiment compared to last quarter when analysts actually raised their estimates through the first two months of the quarter.
"Outside of the Magnificent 7, estimate revisions for 2024 and 2025 [earnings per share] have been uninspiring, but at least stable," Citi US equity strategist Scott Chronert wrote in a note to clients on Friday.
While not an alarming trend to macro strategists like Chronert just yet, the slight hit to what's been otherwise a solid fundamental case for stocks over the next year will be one to watch ahead of third-quarter earnings season.
What to watch next week: All eyes on inflation
It's about to be another busy week on Wall Street, with investors' attention focused on the latest update on consumer prices.
The report, set for release at 8:30 a.m. ET on Wednesday is expected to show headline inflation of 2.6%, a deceleration from July's 2.9% headline reading.
On a "core" basis, which strips out the more volatile costs of food and gas, prices in August are expected to have risen 3.2% over last year, unchanged from July. Economists also expect monthly core prices to remain unchanged, estimating an uptick of 0.2%, according to Bloomberg data.
Inflation has remained above the Federal Reserve's 2% target on an annual basis. But recent economic data, including a weak labor market, has helped solidify an all but certain rate cut by the end of the Fed's next policy meeting on Sept. 18.
The question now becomes just how much the Fed will cut. Next week's inflation report could help clarify that decision.
And here's a look at what other economic data and earnings results to watch out for, courtesy of Yahoo Finance's graphics whiz Brent Sanchez.
Oil prices under pressure after weak US jobs report
Oil prices are heading for their biggest weekly drop in nearly a year after a weak US jobs report spurred more fears of slowing demand.
Crude oil (CL=F) prices fell about 2% to trade just below $68 a barrel. Brent crude (BZ=F) also dipped around 2%, with prices hovering above $71 a barrel.
The moves come after OPEC+ decided to extend their voluntary output cuts until December, further tightening supply through next year.
“We see the OPEC+ unwind delay, ongoing geopolitics and financial positioning providing price support at $70 to $72 Brent,” Citigroup analyst Eric Lee said in a note to clients. The analyst sees prices moving down "to the $60 range in 2025 as a sizable market surplus emerges.”
US economy skating on 'thinner' ice than investors think
US stocks sold off Friday following a weak jobs report for August. But one economist predicts market volatility will likely continue in the months ahead.
"I do think we're probably in an environment now where volatility is going to stay elevated," Michael Darda, chief economist and macro strategist at Roth Capital Partners, said on Yahoo Finance's Stocks in Translation podcast. "The risk of a more material pullback and/or correction is quite high."
Darda pushed back against the idea that the US economy will achieve a "soft landing," a scenario in which higher interest rates lead to lower inflation without a major hit to economic growth.
"We're skating on ice that's a bit thinner than a lot of people presume," he said.
Darda pointed to a rising unemployment rate and elevated earnings expectations, both of which contributed to the stock market routs seen at the start of August and September.
"It's not unprecedented to have a slowdown period that looks like a soft landing, and then a recession ends up taking shape," he said. "That's sort of unexpected now because many have been lulled into this idea that the soft landing is going to be a permanent state of affairs for the business cycle. Equity market valuations reflected that coming into the summer."
"But there's been some cracks in the business cycle," he cautioned, noting expectations for the economy, corporates, and the stock market have remained at "super high" levels.
But it hasn't just been earnings. The jobs market is also telling a particular story.
Last month, the July jobs report spooked markets after unemployment unexpectedly rose to 4.3%, its highest level in nearly three years. The move higher also triggered a closely watched recession indicator known as the Sahm Rule.
Although unemployment ticked slightly lower to 4.2% in August, Darda warned that the accelerated rise in unemployment is still "a bit concerning."
"4.3% is still an incredibly low unemployment rate level that looks quite good in the historical context," he explained. "The problem, if there's a problem, is that we're up to 4.3% from a cyclical trough of 3.4%."
"Those kinds of movements and the level tell us that the economy, if it's still growing, is growing below trend or below the growth rate of potential," he said. "There's an exceptionally fine line between that and an actual recession."
Nvidia slides 5% as chip stocks lead tech losses
Shares of Nvidia (NVDA) sank as much as 5% on Friday as a sell-off in chip stocks led to the downside.
The AI chip heavyweight was under pressure along with other semiconductor names on the last day of what has been a volatile week for stocks.
Shares of Broadcom (AVGO) also sank nearly 9% after the semiconductor giant's lackluster sales forecast for the fourth quarter overshadowed its earnings beat.
Taiwan Semiconductor (TSM), Advanced Micro Devices (AMD), and chip-making giant ASML (ASML) each slid more than 4%.
The Tech (XLK) sector led the markets lower on Friday after the unemployment rate fell to 4.2%, prompting some investors to believe the Federal Reserve will cut rates by 25 basis points instead of 50 basis points at its policy meeting this month.
Investors have increasingly questioned whether capital expenditures for tech infrastructure will continue and if the AI boom has peaked.
Nvidia's stellar growth streak has underpinned the market's rally this year. The stock led a market rebound last month, but failed to continue the rally in late August after a lackluster reception for the company's quarterly results.
Nvidia is on pace to end the shortened trading week down roughly 14%.
Nvidia fell 5% on Friday amid an overall market sell-off as chip stocks led to the downside. Fed's Waller: 'The time has come' to lower rates
Fed Governor Chris Waller echoed a phrase recently used by Fed Chair Jerome Powell on Friday: "The time has come" to lower interest rates at the central bank's next policy meeting in less than two weeks.
"If the data supports cuts at consecutive meetings, then I believe it will be appropriate to cut at consecutive meetings," Waller said in prepared remarks delivered at the University of Notre Dame.
"If the data suggests the need for larger cuts, then I will support that as well. I was a big advocate of front-loading rate hikes when inflation accelerated in 2022, and I will be an advocate of front-loading rate cuts if that is appropriate."
Waller's comments come as the August jobs report highlighted more softness in the labor market, with the number of jobs added last month falling below expectations. The unemployment rate matched expectations at 4.2%.
Stocks sold off shortly after the data's release, with the tech-heavy Nasdaq Composite shedding 2.2% and the benchmark S&P 500 dropping 1.5%. By early afternoon trading, the Dow lost around 350 basis points.
Over the past year, the Federal Reserve has continuously focused on its dual mandate: achieving maximum employment while bringing inflation down to its 2% target.
And for the first half of this year, inflation had been the Fed's priority. But with the rate of price increases finally beginning to ease, that priority has now shifted to the jobs market.
"The current batch of data no longer requires patience, it requires action," Waller said. He added the pace of rate cuts "will be done carefully as the economy and employment continue to grow, in the context of stable inflation, I stand ready to act promptly to support the economy as needed."
Stocks on track for big weekly losses
Stocks took a sizable leg lower on Friday as investors digested an August jobs report that, in some ways, led to more questions than answers when it comes to the future of Federal Reserve monetary policy.
The tech-heavy Nasdaq Composite (^IXIC) led the morning's declines, falling around 2%. The benchmark S&P 500 (^GSPC) fell around 1.3% while the Dow Jones Industrial Average (^DJI) dropped about 0.7%, or nearly 300 points.
The 10-year Treasury yield (^TNX) fell roughly 4 basis points to trade near 3.69% as the odds of a deeper cut increased.
According to the CME FedWatch Tool, markets are now pricing in a 50% chance the Fed cuts rates by 50 basis points by the end of its September meeting.
Coupled with the declines seen in the major indexes, it was also a bloodbath across sectors, with Technology (XLK) plunging 2.6% while Consumer Discretionary (XLY) fell 1.6%.
S&P 500 sectors (Courtesy: Yahoo Finance) Why downward payroll revisions for June and July are not that concerning
Monthly revisions to August's jobs report showed employment was revised down by a combined 86,000 for the months of June and July. But one economist told Yahoo Finance's Morning Brief the revisions don't necessarily point to more weakness.
"It just confirms the cooling trend that we all identified," said Joe Brusuelas, chief economist at RSM. "I don't think this is at risk of the labor market just turning over."
Brusuelas noted the job market only needs to add around 100,000 payrolls to keep the unemployment rate stable.
"What we should expect to see going forward is the trend cooling to about 100,000 a month," he said. "When you're at full employment like the US economy is — and that's a good thing — it's hard to generate a lot of jobs. It just is. And [the labor market] shouldn't because firms have been hoarding labor for a number of years."
In August, the labor market added 142,000 nonfarm payrolls, fewer additions than the 165,000 expected by economists. Meanwhile, the unemployment rate fell slightly to 4.2%, down from 4.3% in July.
The debate now turns to how much the Federal Reserve will cut interest rates. And the answer isn't clear.
"We still believe that the Federal Reserve will only lower rates by 25 basis points during the Federal Open Market Committee meeting in less than two weeks and open the door, by updating the dot plot, to more rate cuts before the end of the year, based on 'incoming data,'" Eugenio Aleman, chief economist at Raymond James, wrote in reaction to the report.
But others see a 50 basis point cut on the horizon.
"Our base case is for 50bp," wrote Andrew Hollenhorst, chief US economist at Citi Research, although he did admit the "report is not definitive for the size of the September rate cut."
According to the CME FedWatch Tool, markets are pricing in a 40% chance the Fed cuts rates by 50 basis points by the end of its September meeting, up from a 30% chance seen a week prior.
Stocks open higher as jobs report points to more labor market cooling
Stocks opened higher on Friday as markets digested the August jobs report, which showed a slight decline in the unemployment rate to 4.2% as the labor market added fewer jobs than expected.
All three major indexes opened about 0.2% higher following earlier losses.
August jobs report: Unemployment rate falls to 4.2%, labor market adds 142,000 jobs
The US economy added fewer jobs than expected in August while the unemployment rate ticked lower.
Data from the Bureau of Labor Statistics released Friday showed the labor market added 142,000 nonfarm payroll jobs in August, fewer additions than the 165,000 expected by economists.
Meanwhile, the unemployment rate fell to 4.2% from 4.3% in July. August job additions came in higher than the revised 89,000 added in July. Additionally, revisions to the June and July labor reports showed the US economy added 86,000 fewer jobs than initially reported in those months.
Wage growth, an important measure for gauging inflation pressures, rose to 3.8% year over year, up from a 3.6% annual gain in July. On a monthly basis, wages increased 0.4%, higher than the 0.2% seen the month prior.
Also in Friday’s report, the labor force participation remained flat from the month prior at 62.7%.
