Economic fears are roiling Wall Street as concerns mount that the Federal Reserve may have left interest rates high for too long, allowing them to hurt U.S. growth.
The alarming economic data of the past few days have deepened those concerns. U.S. job growth slowed more than expected in July, according to a report on Friday, while the unemployment rate rose to 4.3%, heightening fears that a deteriorating labor market could make the economy vulnerable to a recession.
The jobs report exacerbated a selloff in stocks that began Thursday, when data showing weakness in the labor market and manufacturing sector prompted investors to dump everything from chip stocks to industrials while piling into defensive investments.
High-value technology stocks fell again on Friday, extending losses on the Nasdaq Composite .IXIC to more than 10% from a record closing high hit in July. The benchmark S&P 500 .SPX has fallen 5.7% from its July peak.
“This is what you see when you have fears about growth,” said Wasif Latif, president and chief investment officer at Sarmaya Partners. “The market is now realizing that the economy is actually slowing down.”
For months, investors had been encouraged by cooling inflation and gradually slowing employment, believing they strengthened the case for the Fed to begin cutting interest rates. That optimism fueled big gains in stocks: The S&P 500 is still up 12% this year, despite recent losses; the Nasdaq has gained nearly 12%.
With a September rate cut looming after this week's Federal Reserve meeting, investors are concerned that high borrowing costs are already weighing on economic growth. Corporate earnings results, which included disappointments from companies such as Amazon, Alphabet and Intel, added to their worries.
“We are witnessing the consequences of the curse of high expectations,” said James St. Aubin, chief investment officer at Ocean Park Asset Management. “So much has been invested in the soft landing scenario that anything suggesting otherwise is difficult.”
Next week, earnings from industrial group Caterpillar CAT.N and media and entertainment giant Walt Disney DIS.N will offer more insight into consumer health and the manufacturing industry, as well as reports from healthcare heavyweights such as weight-loss drug maker Eli Lilly LLY.N.
Bets in futures markets on Friday suggested growing unease about the economy. Federal funds futures reflected traders pricing in a more than 70% chance of a 50-basis-point cut at the central bank’s September meeting, compared with 22% the day before, according to CME FedWatch. Futures priced in a total of 116 basis points in rate cuts in 2024, compared with just over 60 basis points priced in on Wednesday.
Broader markets also showed signs of unease. The Cboe volatility index .VIX, known as Wall Street's fear gauge, hit its highest level since March 2023 on Friday as demand for options to protect against a sell-off in the stock market increased.
Meanwhile, investors have been rushing to safe haven bonds and other defensive areas of the market. Yields on 10-year U.S. bonds – which move inversely to bond prices – fell to 3.79% on Friday, the lowest level since December.
Sectors that tend to be popular in times of economic uncertainty are also attracting investors.
Options data on the Health Care Select Sector SPDR Fund XLV.P showed the average daily balance between put and call contracts over the past month hit its highest level in about three years, according to a Reuters analysis of Trade Alert data. Options trading on the Utilities Select Sector SPDR Fund XLU.P also showed a pullback in defensive positioning, underscoring traders' expectations for strength in the sector.
The healthcare sector .SPXHC is up 4% over the past month, while utilities .SPLRCU are up more than 9%. By contrast, the Philadelphia SE Semiconductor Index .SOX is down nearly 17% in that period amid sharp losses in investor favorites such as Nvidia NVDA.O and Broadcom AVGO.O.
To be sure, some investors said the data could simply be a reason to lock in profits after the overall market's strong performance in 2024.
“This is a good excuse for investors to sell after a huge rally so far this year,” said Michael Purves, chief executive of Tallbacken Capital Advisors. “Investors should be prepared for significant volatility, particularly in the big tech stocks. But it will likely be short-lived.”